UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-04550
THE MAINSTAY FUNDS
(Exact name of Registrant as specified in charter)
51 Madison Avenue, New York, NY 10010
(Address of principal executive offices) (Zip code)
Marguerite E.H. Morrison, Esq.
169 Lackawanna Avenue
Parsippany, NJ 07054
(Name and address of agent for service)
Registrant's telephone number, including area code: (973) 394-4437
Date of fiscal year end: October 31
Date of reporting period: October 31, 2007
ITEM 1. REPORTS TO STOCKHOLDERS.
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
CAPITAL APPRECIATION FUND
Message from the President
and
Annual Report
October 31, 2007
MESSAGE FROM
THE PRESIDENT
The 12-month period ended October 31, 2007, was a dynamic one for mutual fund
investors. U.S. equity markets generally advanced, with growth stocks out-
performing value stocks at all capitalization levels. Although past performance
is no guarantee of future results, international stocks as a whole provided even
stronger returns for U.S. investors.
The progress of the equity markets, however, was far from steady. In February,
weakness in Asian markets led to sharp price declines around the globe. The
correction caused many investors to reconsider whether China and other emerging
economies could sustain their rapid growth. Fortunately, strong
corporate-earnings reports and positive economic news helped the stock market
regain its footing.
In July and August, difficulties in the subprime-mortgage market led to another
stock-market correction. A number of high-profile mortgage originators either
closed their doors or were sold to larger entities. Other leading financial
services firms faced major write-offs because of subprime-mortgage exposure.
The Federal Open Market Committee (FOMC) took prompt action to increase
liquidity and stabilize the financial markets by lowering the discount rate and
the federal funds target rate during the reporting period. These Federal Reserve
moves helped calm investor concerns, and the stock market generally advanced
from August 16, 2007, the date of an unscheduled FOMC meeting, through the end
of October 2007.
Difficulties in the subprime-mortgage market led to a "flight to quality," or a
general movement toward fixed-income securities that carry lower risk. As demand
for short- and intermediate-term Treasury securities increased, yields fell
across much of the maturity spectrum. Yields rose, however, on 20-and 30-year
Treasury bonds, and the yield curve steepened during the 12-month reporting
period.
High-yield bonds rallied from November 2006 through May 2007. But in June and
July, the yield differences--or spreads--between high-yield bonds and comparable
Treasury securities began to widen. At the end of October 2007, these spreads
were wider than when the reporting period began, making high-yield securities
more attractive to investors willing to accept higher risk.
To help investors address the challenges of today's ever-changing markets, New
York Life Investment Management LLC provides access to seven institutional
investment boutiques, each with its own proprietary research and investment
culture. As advisors and subadvisors to MainStay Funds, these boutiques bring a
wealth of experience and market insight to our shareholders. The portfolio
managers of each MainStay Fund seek to consistently apply time-tested investment
principles across a wide variety of market environments.
The report that follows provides more specific information about the market
forces and investment decisions that affected your investment in MainStay Funds
from November 1, 2006, through October 31, 2007. Please read the report
carefully. As you do, bear in mind that this annual report reflects just a short
segment of your lifetime investment journey. We look forward to continuing to
work with you, wherever that journey may lead.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
CAPITAL APPRECIATION FUND
MainStay Funds
Annual Report
October 31, 2007
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 10
- --------------------------------------------------------------------------------
Financial Statements 12
- --------------------------------------------------------------------------------
Notes to Financial Statements 18
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 23
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 24
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 26
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 26
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 26
- --------------------------------------------------------------------------------
Trustees and Officers 27
</Table>
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT
MONTH-END PERFORMANCE INFORMATION, PLEASE CALL 1-800-MAINSTAY (1-800-624-6782)
OR VISIT WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ----------------------------------------------------
With sales charges 12.73% 9.34% 3.04%
Excluding sales charges 19.29 10.58 3.63
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $) (With sales charges)
<Table>
<Caption>
RUSSELL 1000 GROWTH
CLASS A S&P 500 INDEX INDEX
------- ------------- -------------------
10/31/97 9450 10000 10000
11294 12199 12464
14824 15331 16733
16668 16264 18294
10258 12214 10987
8162 10369 8831
9469 12526 10758
9427 13706 11121
10456 14901 12102
11315 17336 13414
10/31/07 13498 19860 15992
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ----------------------------------------------------
With sales charges 13.41% 9.48% 2.83%
Excluding sales charges 18.41 9.75 2.83
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $) (With sales charges)
<Table>
<Caption>
RUSSELL 1000 GROWTH
CLASS B S&P 500 INDEX INDEX
------- ------------- -------------------
10/31/97 10000 10000 10000
11854 12199 12464
15438 15331 16733
17227 16264 18294
10519 12214 10987
8305 10369 8831
9557 12526 10758
9444 13706 11121
10399 14901 12102
11169 17336 13414
10/31/07 13225 19860 15992
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ----------------------------------------------------
With sales charges 17.45% 9.76% 2.84%
Excluding sales charges 18.45 9.76 2.84
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $) (With sales charges)
<Table>
<Caption>
RUSSELL 1000 GROWTH
CLASS C S&P 500 INDEX INDEX
------- ------------- -------------------
10/31/97 10000 10000 10000
11854 12199 12464
15438 15331 16733
17227 16264 18294
10519 12214 10987
8305 10369 8831
9557 12526 10758
9444 13706 11121
10399 14901 12102
11169 17336 13414
10/31/07 13229 19860 15992
</Table>
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect maximum applicable sales charges explained in this paragraph, change in
share price, and reinvestment of dividend and capital-gain distributions. The
graphs assume an initial investment of $10,000 and reflect the deduction of all
sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase and have an annual 12b-1 fee of 1.00%,
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee and are generally available to corporate and institutional investors
with a minimum initial investment of $5 million. Prior to 9/1/98 (for Class C
shares) and 1/2/04 (for Class I shares), performance for Class C and Class I
shares includes the historical performance of Class B shares adjusted to reflect
the applicable sales charge (or CDSC), fees, estimated expenses, and fee
waivers/expense limitations of Class C and Class I shares upon initial offer.
Unadjusted, the performance shown for the newer classes of shares might have
been lower.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ----------------------------------------------------
20.01% 11.00% 3.83%
</Table>
(LINE GRAPH FOR CLASS I IN $)
<Table>
<Caption>
RUSSELL 1000 GROWTH
CLASS I S&P 500 INDEX INDEX
------- ------------- -------------------
10/31/97 10000 10000 10000
11969 12199 12464
15729 15331 16733
17690 16264 18294
10844 12214 10987
8644 10369 8831
10046 12526 10758
10021 13706 11121
11150 14901 12102
12135 17336 13414
10/31/07 14564 19860 15992
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS(1) YEARS(1)
- ------------------------------------------------------------------------------------
Russell 1000(R) Growth Index(2) 19.23% 12.61% 4.81%
S&P 500(R) Index(3) 14.56 13.88 7.10
Average Lipper large-cap growth fund(4) 21.72 11.94 5.47
</Table>
1. Performance figures shown reflect nonrecurring reimbursements from affiliates
for professional fees and losses attributable to shareholder trading
arrangements. If these nonrecurring reimbursements had not been made the
total return (excluding sales charges) would have been 10.57% for Class A,
9.57% for Class B, 9.68% for Class C and 11.00% for Class I for the five-year
period ended October 31, 2007, and 3.62% for Class A, 2.75% for Class B,
2.80% for Class C and 3.83% for Class I for the ten-year period then ended.
2. The Russell 1000(R) Growth Index is an unmanaged index that measures the
performance of those Russell 1000(R) companies with higher price-to-book
ratios and higher forecasted growth values. The Russell 1000(R) Index is an
unmanaged index that measures the performance of the 1,000 largest U.S.
companies based on total market capitalization. Results assume reinvestment
of all income and capital gains. The Russell 1000(R) Growth Index is
considered to be the Fund's broad-based securities-market index for
comparison purposes. An investment cannot be made directly in an index.
3. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500(R)
is an unmanaged index and is widely regarded as the standard for measuring
large-cap U.S. stock-market performance. Results assume reinvestment of all
income and capital gains. An investment cannot be made directly in an index.
4. Lipper Inc. is an independent monitor of fund performance. Results are based
on total returns with all dividend and capital-gain distributions reinvested.
THE DISCLOSURE ON THE PRECEDING PAGE IS AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Capital Appreciation Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2007, to October 31, 2007,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1,
2007, to October 31, 2007.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six-months ended October 31, 2007. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/07 10/31/07 PERIOD(1) 10/31/07 PERIOD(1)
CLASS A SHARES $1,000.00 $1,103.00 $ 6.57 $1,018.80 $ 6.31
- --------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,099.25 $10.53 $1,015.05 $10.11
- --------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,099.25 $10.53 $1,015.05 $10.11
- --------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,105.35 $ 3.45 $1,021.75 $ 3.31
- --------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's net annualized expense ratio of each class
(1.24% for Class A, 1.99% for Class B and Class C, and 0.65% for Class I)
multiplied by the average account value over the period, divided by 365 and
multiplied by 184 (to reflect the one-half year period).
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2007
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 99.6
Short-Term Investments (collateral from securities lending 10.9
is 10.7%)
Liabilities in Excess of Cash and Other Assets (10.5)
</Table>
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2007 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Microsoft Corp.
2. Southern Copper Corp.
3. Apple, Inc.
4. Google, Inc., Class A
5. National Oilwell Varco, Inc.
6. Precision Castparts Corp.
7. Cisco Systems, Inc.
8. Thermo Fisher Scientific, Inc.
9. NVIDIA Corp.
10. Hewlett-Packard Co.
</Table>
8 MainStay Capital Appreciation Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Edmund C. Spelman of MacKay Shields LLC
HOW DID MAINSTAY CAPITAL APPRECIATION FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2007?
Excluding all sales charges, MainStay Capital Appreciation Fund returned 19.29%
for Class A shares, 18.41% for Class B shares and 18.45% for Class C shares for
the 12 months ended October 31, 2007. Over the same period, the Fund's Class I
shares returned 20.01%. All share classes underperformed the 21.72% return of
the average Lipper(1) large-cap growth fund for the 12-month reporting period.
Class A and Class I shares outperformed--and Class B and Class C shares
underperformed--the 19.23% return of the Russell 1000(R) Growth Index,(2) the
Fund's broad-based securities-market index, for the 12 months ended October 31,
2007. See page 5 for Fund returns with sales charges.
DURING THE REPORTING PERIOD, WHICH SECTORS HAD THE GREATEST POSITIVE IMPACT ON
THE FUND'S PERFORMANCE, AND WHICH HAD A NEGATIVE IMPACT?
Sector weightings in the Fund result from our bottom-up, stock-by-stock
selection process. During the reporting period, the Fund's top-performing
sectors in terms of absolute and relative returns were technology, energy and
materials. Consumer and retail stocks experienced the biggest absolute declines.
WHICH INDIVIDUAL SECURITIES WERE THE STRONGEST PERFORMERS DURING THE REPORTING
PERIOD?
Top-contributing stocks during the reporting period included Southern Copper,
which produces copper and operates mining, smelting and refining facilities;
National Oilwell Varco, an exploration and production services and equipment
company, which experienced increased demand largely because of rising oil
prices; and Apple Computer, which benefited from continued strong sales for its
existing products and from the company's entry into the cellular phone handset
market.
DURING THE REPORTING PERIOD, WHICH STOCKS DETRACTED FROM PERFORMANCE?
Holdings in financial services and retail detracted from the Fund's performance.
First Marblehead, which provides services for private education loans, saw its
share price decline on investor concerns about the credit markets and new
entrants into the field of education loans. Merrill Lynch shares declined
because of the company's exposure to collateralized debt obligations and
mortgage-backed securities. J.C. Penney's shares fell on weaker-than-expected
sales and because of investor concerns about consumer spending.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
In light of their strong contributions to performance, Southern Copper and
National Oilwell Varco were the Fund's most significant new positions. The Fund
also initiated positions in ExxonMobil and Google during the reporting period.
We eliminated the Fund's positions in a number of industrial stocks, such as
Danaher, which designs and manufactures industrial and consumer products;
Federal Express, a worldwide express delivery company; and United Technologies,
which provides high-technology products and support services to customers in the
aerospace and building industries worldwide. We also eliminated some of the
Fund's retail holdings, including Lowe's. The company sells goods and services
for home improvement.
HOW DID THE FUND'S WEIGHTINGS AFFECT PERFORMANCE DURING THE REPORTING PERIOD?
During the reporting period, the Fund remained significantly overweight relative
to the Russell 1000(R) Growth Index in energy and modestly overweight in
materials. Both of these positions contributed positively to the Fund's
performance. Stock selection in the underweight health care sector also
contributed positively to the Fund's results relative to the benchmark. On the
other hand, a meaningful overweight in the consumer discretionary sector
detracted from the Fund's performance.
The principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a certain rate that is generally higher than the rate
expected for nongrowth companies. If these expectations are not met, the market
price for the stock may decline significantly, even if earnings showed an
absolute increase.
1. See footnote on page 6 for more information about Lipper Inc.
2. See footnote on page 6 for more information on the Russell 1000(R) Growth
Index.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecast made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (99.6%) +
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (2.7%)
V Precision Castparts Corp. 194,200 $ 29,093,102
--------------
AUTOMOBILES (0.7%)
Harley-Davidson, Inc. (a) 141,800 7,302,700
--------------
BIOTECHNOLOGY (3.5%)
Celgene Corp. (b) 314,500 20,757,000
Genentech, Inc. (b) 229,300 16,998,009
--------------
37,755,009
--------------
CAPITAL MARKETS (3.1%)
Goldman Sachs Group, Inc. (The) 51,400 12,743,088
Merrill Lynch & Co., Inc. 117,000 7,724,340
Morgan Stanley 183,400 12,335,484
--------------
32,802,912
--------------
COMMERCIAL SERVICES & SUPPLIES (2.3%)
Manpower, Inc. 200,200 14,962,948
Robert Half International, Inc. (a) 319,400 9,610,746
--------------
24,573,694
--------------
COMMUNICATIONS EQUIPMENT (2.6%)
V Cisco Systems, Inc. (b) 854,700 28,256,382
--------------
COMPUTERS & PERIPHERALS (7.2%)
V Apple, Inc. (b) 210,000 39,889,500
V Hewlett-Packard Co. 474,400 24,516,992
Network Appliance, Inc. (b) 391,700 12,334,633
--------------
76,741,125
--------------
CONSUMER FINANCE (0.5%)
First Marblehead Corp. (The) (a) 138,300 5,370,189
--------------
DIVERSIFIED FINANCIAL SERVICES (1.9%)
IntercontinentalExchange, Inc. (a)(b) 116,700 20,795,940
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES (2.1%)
AT&T, Inc. 542,300 22,662,717
--------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (1.8%)
Amphenol Corp. Class A 443,900 19,651,453
--------------
</Table>
<Table>
<Caption>
SHARES VALUE
ENERGY EQUIPMENT & SERVICES (11.9%)
Baker Hughes, Inc. 234,300 $ 20,318,496
Cameron International Corp. (b) 231,400 22,529,104
ENSCO International, Inc. 247,100 13,711,579
Halliburton Co. 596,100 23,498,262
V National Oilwell Varco, Inc. (b) 403,600 29,559,664
Smith International, Inc. 280,500 18,527,025
--------------
128,144,130
--------------
HEALTH CARE PROVIDERS & SERVICES (1.8%)
Humana, Inc. (b) 252,300 18,909,885
--------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (2.0%)
NRG Energy, Inc. (b) 457,800 20,903,148
--------------
INSURANCE (1.4%)
Assurant, Inc. 264,700 15,469,068
--------------
INTERNET SOFTWARE & SERVICES (4.1%)
Akamai Technologies, Inc. (a)(b) 351,500 13,775,285
V Google, Inc. Class A (b) 42,600 30,118,200
--------------
43,893,485
--------------
IT SERVICES (1.2%)
Cognizant Technology Solutions Corp. Class A (b) 301,000 12,479,460
--------------
LIFE SCIENCES TOOLS & SERVICES (2.4%)
V Thermo Fisher Scientific, Inc. (b) 442,300 26,011,663
--------------
MEDIA (2.6%)
Comcast Corp. Class A (b) 410,350 8,637,868
DIRECTV Group, Inc. (The) (b) 744,500 19,714,360
--------------
28,352,228
--------------
METALS & MINING (5.4%)
Allegheny Technologies, Inc. (a) 164,500 16,806,965
V Southern Copper Corp. (a) 295,500 41,281,350
--------------
58,088,315
--------------
MULTILINE RETAIL (3.9%)
J.C. Penney Co., Inc. 241,400 13,576,336
Kohl's Corp. (b) 272,800 14,995,816
Nordstrom, Inc. 325,100 12,821,944
--------------
41,394,096
--------------
MULTI-UTILITIES (1.2%)
CenterPoint Energy, Inc. (a) 788,600 13,216,936
--------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
10 MainStay Capital Appreciation Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS (5.5%)
ExxonMobil Corp. 139,900 $ 12,869,401
Williams Cos., Inc. 633,800 23,127,362
XTO Energy, Inc. 347,500 23,067,050
--------------
59,063,813
--------------
PHARMACEUTICALS (2.2%)
Schering-Plough Corp. 778,000 23,744,560
--------------
ROAD & RAIL (1.8%)
Norfolk Southern Corp. 371,300 19,177,645
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (6.4%)
Applied Materials, Inc. 1,012,000 19,653,040
MEMC Electronic Materials, Inc. (b) 320,300 23,452,366
V NVIDIA Corp. (a)(b) 713,650 25,248,937
--------------
68,354,343
--------------
SOFTWARE (7.6%)
BMC Software, Inc. (b) 414,200 14,016,528
V Microsoft Corp. 1,185,100 43,623,531
Oracle Corp. (b) 1,089,400 24,151,998
--------------
81,792,057
--------------
SPECIALTY RETAIL (7.1%)
Abercrombie & Fitch Co. Class A 183,700 14,549,040
American Eagle Outfitters, Inc. 476,800 11,338,304
AutoZone, Inc. (a)(b) 115,300 14,344,473
CarMax, Inc. (a)(b) 366,400 7,646,768
Limited Brands, Inc. 514,800 11,330,748
TJX Cos., Inc. 574,800 16,628,964
--------------
75,838,297
--------------
TEXTILES, APPAREL & LUXURY GOODS (2.7%)
Coach, Inc. (b) 434,600 15,888,976
Polo Ralph Lauren Corp. 182,200 12,535,360
--------------
28,424,336
--------------
Total Common Stocks
(Cost $825,492,139) 1,068,262,688
--------------
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (10.9%)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (0.2%)
Deutsche Bank Financial LLC
4.77%, due 11/1/07 $ 2,240,000 $ 2,240,000
--------------
Total Commercial Paper
(Cost $2,240,000) 2,240,000
--------------
<Caption>
SHARES
INVESTMENT COMPANY (10.7%)
State Street Navigator Securities Lending Prime
Portfolio (c) 114,757,486 114,757,486
--------------
Total Investment Company
(Cost $114,757,486) 114,757,486
--------------
Total Short-Term Investments
(Cost $116,997,486) 116,997,486
--------------
Total Investments
(Cost $942,489,625) 110.5% 1,185,260,174(d)
Liabilities in Excess of Cash and Other Assets (10.5) (112,482,891)
----------- --------------
Net Assets 100.0% $1,072,777,283
=========== ==============
</Table>
<Table>
(a) Represents a security, or a portion thereof, which is out on loan. The
aggregate market value of such securities is $111,218,359; cash collateral
of $114,757,486 (included in liabilities) was received with which the Fund
purchased highly liquid short-term investments.
(b) Non-income producing security.
(c) Represents a security, or a portion thereof, purchased with cash collateral
received for securities on loan.
(d) At October 31, 2007, cost is $942,538,274 for federal income tax purposes
and net unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $279,758,902
Gross unrealized depreciation (37,037,002)
------------
Net unrealized appreciation $242,721,900
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 11
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2007
<Table>
ASSETS:
Investment in securities, at value
(identified cost $942,489,625) including
$111,218,359 market value of securities
loaned $1,185,260,174
Cash 102,036
Receivables:
Investment securities sold 4,039,891
Dividends and interest 548,173
Fund shares sold 200,143
Other assets 20,660
--------------
Total assets 1,190,171,077
--------------
LIABILITIES:
Securities lending collateral 114,757,486
Payables:
Fund shares redeemed 812,797
Transfer agent (See Note 3) 600,096
Manager (See Note 3) 573,246
NYLIFE Distributors (See Note 3) 453,075
Shareholder communication 125,113
Professional fees 42,160
Trustees 13,251
Custodian 7,069
Accrued expenses 9,501
--------------
Total liabilities 117,393,794
--------------
Net assets $1,072,777,283
==============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding
(par value of $.01 per share) unlimited
number of shares authorized $ 285,077
Additional paid-in capital 762,883,709
--------------
763,168,786
Accumulated net realized gain on investments 66,837,948
Net unrealized appreciation on investments 242,770,549
--------------
Net assets $1,072,777,283
==============
CLASS A
Net assets applicable to outstanding shares $ 754,213,568
==============
Shares of beneficial interest outstanding 19,423,876
==============
Net asset value per share outstanding $ 38.83
Maximum sales charge (5.50% of offering
price) 2.26
--------------
Maximum offering price per share outstanding $ 41.09
==============
CLASS B
Net assets applicable to outstanding shares $ 311,589,906
==============
Shares of beneficial interest outstanding 8,889,781
==============
Net asset value and offering price per share
outstanding $ 35.05
==============
CLASS C
Net assets applicable to outstanding shares $ 5,442,704
==============
Shares of beneficial interest outstanding 155,262
==============
Net asset value and offering price per share
outstanding $ 35.05
==============
CLASS I
Net assets applicable to outstanding shares $ 1,531,105
==============
Shares of beneficial interest outstanding 38,798
==============
Net asset value and offering price per share
outstanding $ 39.46
==============
</Table>
12 MainStay Capital Appreciation Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2007
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 8,860,646
Interest 789,207
Income from securities loaned--net 789,011
-------------
Total income 10,438,864
-------------
EXPENSES:
Manager (See Note 3) 6,179,731
Transfer agent--Classes A, B and C
(See Note 3) 3,575,389
Distribution/Service--Class A (See Note 3) 1,766,901
Service--Class B (See Note 3) 863,622
Service--Class C (See Note 3) 13,623
Distribution--Class B (See Note 3) 2,590,866
Distribution--Class C (See Note 3) 40,869
Shareholder communication 176,733
Professional fees 174,459
Recordkeeping 132,461
Registration 78,686
Trustees 57,565
Custodian 29,499
Miscellaneous 44,855
-------------
Total expenses 15,725,259
-------------
Net investment loss (5,286,395)
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 251,499,379
Net change in unrealized appreciation on
investments (62,640,510)
-------------
Net realized and unrealized gain on
investments 188,858,869
-------------
Net increase in net assets resulting from
operations $183,572,474
=============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 13
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2007 AND OCTOBER 31, 2006
<Table>
<Caption>
2007 2006
DECREASE IN NET ASSETS:
Operations:
Net investment loss $ (5,286,395) $ (11,223,939)
Net realized gain on investments 251,499,379 54,523,653
Net increase from payments from
Manager for losses attributable
to shareholder trading
arrangements (See Note 3 (B) on
page 19.) -- 3,205,000
Net change in unrealized
appreciation on investments (62,640,510) 44,444,576
-------------------------------
Net increase in net assets
resulting from operations 183,572,474 90,949,290
-------------------------------
Capital share transactions:
Net proceeds from sale of shares 57,847,613 138,871,019
Cost of shares redeemed (270,047,730) (347,475,978)
Net asset value of shares
converted
(See Note 1):
Class A 68,546,841 498,514,133
Class B (68,546,841) (498,514,133)
-------------------------------
Decrease in net assets derived
from capital share transactions (212,200,117) (208,604,959)
-------------------------------
Net decrease in net assets (28,627,643) (117,655,669)
NET ASSETS:
Beginning of year 1,101,404,926 1,219,060,595
-------------------------------
End of year $1,072,777,283 $1,101,404,926
===============================
</Table>
14 MainStay Capital Appreciation Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
www.mainstayfunds.com 15
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
-------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of period $ 32.55 $ 30.08 $ 27.12 $ 27.24 $ 22.49 $ 32.86
-------- -------- -------- -------- ----------- ------------
Net investment loss (a) (0.09) (0.20) (0.12)(b) (0.13) (0.09) (0.13)
Net realized and unrealized gain (loss) on
investments 6.37 2.67 (e) 3.08 0.01 4.84 (10.24)
-------- -------- -------- -------- ----------- ------------
Total from investment operations 6.28 2.47 2.96 (0.12) 4.75 (10.37)
-------- -------- -------- -------- ----------- ------------
Net asset value at end of period $ 38.83 $ 32.55 $ 30.08 $ 27.12 $ 27.24 $ 22.49
======== ======== ======== ======== =========== ============
Total investment return (c) 19.29% 8.21%(d)(e) 10.91% (0.44%) 21.12%(f) (31.56%)
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (0.25%) (0.63%) (0.41%)(b) (0.48%) (0.45%)+ (0.48%)
Net expenses 1.24% 1.30% 1.27% 1.25% 1.30%+ 1.28%
Expenses (before reimbursement) 1.24% 1.31%(d) 1.27% 1.25% 1.30%+ 1.23%
Portfolio turnover rate 91% 23% 27% 28% 19% 69%
Net assets at end of period (in 000's) $754,214 $701,374 $220,611 $268,199 $335,484 $277,526
</Table>
<Table>
<Caption>
CLASS C
-----------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of period $29.60 $27.56 $25.03 $25.33 $ 21.05 $ 31.00
------ ------ ------ ------ ----------- ------------
Net investment income (loss) (a) (0.31) (0.39) (0.31)(b) (0.32) (0.23) (0.32)
Net realized and unrealized gain (loss) on
investments 5.76 2.43 (e) 2.84 0.02 4.51 (9.63)
------ ------ ------ ------ ----------- ------------
Total from investment operations 5.45 2.04 2.53 (0.30) 4.28 (9.95)
------ ------ ------ ------ ----------- ------------
Net asset value at end of period $35.05 $29.60 $27.56 $25.03 $ 25.33 $ 21.05
====== ====== ====== ====== =========== ============
Total investment return (c) 18.45% 7.40%(d)(e) 10.11% (1.18%) 20.33%(f) (32.10%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) (1.00%) (1.35%) (1.16%)(b) (1.23%) (1.20%)+ (1.23%)
Net expenses 1.99% 2.05% 2.02% 2.00% 2.05%+ 2.03%
Expenses (before reimbursement) 1.99% 2.06%(d) 2.02% 2.00% 2.05%+ 1.98%
Portfolio turnover rate 91% 23% 27% 28% 19% 69%
Net assets at end of period (in 000's) $5,443 $5,953 $7,120 $8,694 $10,475 $ 9,819
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Net investment loss and the ratio of net investment loss includes $0.05 per share and
0.18%, respectively as a result of a special one time dividend from Microsoft Corp.
(c) Total return is calculated exclusive of sales charges. Class I Shares are not subject to
sales charges.
(d) Includes nonrecurring reimbursements from Manager for professional fees. The effect on
total return was less than one hundredth of a percent.
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses were $0.08 per share on net
realized gains on investments and the effect on total investment return was 0.11% for
Class A, 0.27% for Class I and 0.72% for Class B and 0.32% for Class C, respectively.
(f) Total return is not annualized.
</Table>
16 MainStay Capital Appreciation Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
-------------------------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
$ 29.60 $ 27.56 $ 25.03 $ 25.33 $ 21.05 $ 30.99
-------- -------- -------- ---------- ----------- ------------
(0.31) (0.38) (0.31)(b) (0.32) (0.23) (0.32)
5.76 2.42 (e) 2.84 0.02 4.51 (9.62)
-------- -------- -------- ---------- ----------- ------------
5.45 2.04 2.53 (0.30) 4.28 (9.94)
-------- -------- -------- ---------- ----------- ------------
$ 35.05 $ 29.60 $ 27.56 $ 25.03 $ 25.33 $ 21.05
======== ======== ======== ========== =========== ============
18.41% 7.40%(d)(e) 10.11% (1.18%) 20.33%(f) (32.07%)
(0.99%) (1.31%) (1.16%)(b) (1.23%) (1.20%)+ (1.23%)
1.99% 2.05% 2.02% 2.00% 2.05%+ 2.03%
1.99% 2.06%(d) 2.02% 2.00% 2.05%+ 1.98%
91% 23% 27% 28% 19% 69%
$311,590 $394,077 $991,328 $1,134,299 $1,300,835 $1,165,260
</Table>
<Table>
<Caption>
CLASS I
- --------------------------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2007 2006 2005 2004
$32.88 $ 30.21 $ 27.15 $ 28.48
------ -------- ------- -----------
0.03 0.14 (0.06)(b) (0.11)
6.55 2.53 (e) 3.12 (1.22)
------ -------- ------- -----------
6.58 2.67 3.06 (1.33)
------ -------- ------- -----------
$39.46 $ 32.88 $ 30.21 $ 27.15
====== ======== ======= ===========
20.01% 8.84%(d)(e) 11.27% (4.67%)(f)
0.09% 0.44% (0.18%)(b) (0.11%)+
0.65% 0.60% 1.04% 0.88%+
0.65% 0.61%(d) 1.04% 0.88%+
91% 23% 27% 28%
$1,531 $ 1 $ 1 $ 1
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 17
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises nineteen funds (collectively referred to as the
"Funds"). These financial statements and notes relate only to MainStay Capital
Appreciation Fund (the "Fund"), a diversified fund.
The Fund currently offers four classes of shares. Class A shares commenced on
January 3, 1995. Class B shares commenced on May 1, 1986. Class C shares
commenced on September 1, 1998. Class I shares commenced on January 2, 2004.
Class A shares are offered at net asset value per share plus an initial sales
charge. No sales charge applies on investments of $1 million or more (and
certain other qualified purchases) in Class A shares, but a contingent deferred
sales charge is imposed on certain redemptions of such shares within one year of
the date of purchase. Class B shares and Class C shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within up to six years of purchase of Class B
shares and a 1% contingent deferred sales charge may be imposed on redemptions
made within one year of purchase of Class C shares. Class I shares are not
subject to a sales charge. As approved by the Board of Trustees in 1997, Class B
shares convert to Class A shares eight years after the date they were purchased.
The four classes of shares bear the same voting (except for issues that relate
solely to one class), dividend, liquidation and other rights and conditions
except that Class B and Class C shares are subject to higher distribution fee
rates than Class A shares under a distribution plan pursuant to Rule 12b-1 under
the 1940 Act. Class I shares are not subject to a distribution or service fee.
The Fund's investment objective is to seek long-term growth of capital. Dividend
income, if any, is an incidental consideration.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). Securities that are not traded on the valuation date are
valued at the mean of the latest quoted bid and asked prices. Prices normally
are taken from the principal market in which each security trades. Investments
in mutual funds are valued at their net asset value as of the close of the New
York Stock Exchange on the date of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: a security the trading for which has been
halted or suspended; a debt security that has recently gone into default and for
which there is not a current market quotation; a security of an issuer that has
entered into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; a security where the trading on that security's principal market
is temporarily closed at a time when, under normal conditions, it would be open.
At October 31, 2007, the Fund did not hold securities that were valued in such a
manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
of net investment income and distributions of net realized capital and currency
gains, if any, annually. All dividends and distributions are reinvested in
shares of the Fund, at net asset value, unless the shareholder elects otherwise.
Dividends and distributions to shareholders are determined in accordance with
federal income tax regulations and may differ from generally accepted accounting
principles in the United States of America. Permanent book/tax differences
relating to income and gains are reclassified amongst undistributed net
investment income, accumulated net realized gain or loss and paid-in-capital.
18 MainStay Capital Appreciation Fund
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (C) on
page 20) are allocated to separate classes of shares pro rata based upon their
relative net assets value on the date the expenses are incurred. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) SECURITIES LENDING. In order to realize additional income the Fund may lend
its securities to broker-dealers and financial institutions. The loans are
collateralized by cash or securities at least equal at all times to the market
value of the securities loaned. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. The Fund may bear
the risk of delay in recovery of, or loss of rights in, the securities loaned
should the borrower of the securities experience financial difficulty. The Fund
receives compensation for lending its securities in the form of fees or it
retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(H) INDEMNIFICATIONS. In the normal course of business, the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote.
However, there can be no assurance that material liabilities related to such
obligations will not arise in the future which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager") a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. NYLIM provides offices and conducts clerical, recordkeeping and
bookkeeping services, and is responsible for the financial and accounting
records required to be maintained by the Fund. NYLIM also pays the salaries and
expenses of all personnel affiliated with the Fund and all the operational
expenses that are not the responsibility of the Fund. MacKay Shields LLC (the
"Subadvisor"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life, serves as subadvisor to the Fund and is responsible
for the day-to-day portfolio management of the Fund. Pursuant to the terms of a
Subadvisory Agreement between NYLIM and the Subadvisor, NYLIM pays for the
services of the Subadvisor.
The Trust, on behalf of the Fund, pays NYLIM a monthly fee for services
performed and the facilities furnished at an annual percentage rate of the
Fund's average daily net assets as follows: 0.72% on assets up to $200 million,
0.65% on assets from $200 million to $500 million and 0.50% on assets in excess
of $500 million. For the year ended October 31, 2007, NYLIM earned fees from the
Fund in the amount of $6,179,731.
State Street Bank & Trust Company ("SSBT"), One Lincoln Street, Boston,
Massachusetts, 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with NYLIM. These services include calculating
daily net asset values of the Fund, maintaining general ledger and sub-ledger
accounts for the calculation of the Fund's respective net asset values, and
assisting NYLIM in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, SSBT is compensated by
NYLIM.
(B) PAYMENTS FROM AFFILIATES. NYLIM reimbursed or paid all expenses relating to
the Board of Trustees' review of certain shareholder trading matters as
described below in the footnote relating to "Other Matters." (See Note 9 on page
22.)
www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The total costs associated with the Board of Trustees' review were approximately
$849,975 and included payments to certain third party service providers.
The amount that was reimbursed to the Fund was $120,946. Additional payments
were made by affiliates relating to the shareholder trading matters. Further
discussion regarding these payments by affiliates can be found below in the
footnote relating to "Other Matters."
(C) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, other than Class I shares, has adopted distribution plans
(the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940
Act.
Pursuant to the Class A Plan, the Distributor receives a monthly distribution
fee from the Fund at an annual rate of 0.25% of the average daily net assets of
the Fund's Class A shares, which is an expense of the Class A shares of the Fund
for distribution or service activities as designated by the Distributor.
Pursuant to the Class B and Class C Plans, the Fund pays the Distributor a
monthly distribution fee, which is an expense of the Class B and Class C shares
of the Fund, at the annual rate of 0.75% of the average daily net assets of the
Fund's Class B and Class C shares. The Plans provide that the Class B and Class
C shares of the Fund also incur a service fee at the annual rate of 0.25% of the
average daily net asset value of the Class B and Class C shares of the Fund.
Class I shares are not subject to a distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(D) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $71,455 for the year ended
October 31, 2007. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $9,716, $499,477 and $1,014, respectively, for the year ended October
31, 2007.
(E) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund, for the year ended October 31, 2007,
amounted to $3,575,389.
(F) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts, effective March 1, 2007. Shareholders with an account
balance of less than $1,000 are charged an annual per account fee of $20
(assessed semi-annually).
(G) CAPITAL. At October 31, 2007, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $349,216 0.0*%
- --------------------------------------------------------------
Class C 97 0.0*
- --------------------------------------------------------------
Class I 1,386 0.1
- --------------------------------------------------------------
</Table>
* Less than one-tenth of a percent.
(H) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2007, these fees, which are included in professional fees
shown on the Statement of Operations, were $39,393.
The Fund pays the Manager a monthly fee for certain pricing and recordkeeping
services provided under the Accounting Agreement at the annual rate of 1/20 of
1% for the first $20 million of average monthly net assets, 1/30 of 1% of the
next $80 million of average monthly net assets and 1/100 of 1% of any amount in
excess of $100 million of average monthly net assets. Fees for these services
provided to the Fund by the Manager amounted to $132,461 for the year ended
October 31, 2007.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2007, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL GAIN TEMPORARY APPRECIATION ACCUMULATED
INCOME (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$ -- $66,886,597 $ -- $242,721,900 $309,608,497
---------------------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals.
The following table discloses the current year reclassification between net
investment loss and additional paid-in capital, arising from permanent
differences; net assets at October 31, 2007 are not affected.
<Table>
<Caption>
ACCUMULATED
ACCUMULATED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$5,286,395 $ -- $(5,286,395)
------------------------------------------------------------------
</Table>
20 MainStay Capital Appreciation Fund
The reclassifications for the Fund are primarily due to net operating loss.
The Fund utilized $183,500,350 of capital loss carryforwards during the year
ended October 31, 2007.
NOTE 5--CUSTODIAN:
SSBT is the custodian of cash and securities of the Fund. Custodial fees are
charged to the Fund based on the market value of securities in the Fund and the
number of certain cash transactions incurred by the Fund.
NOTE 6--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. These funds pay a commitment fee, at an annual rate of .060% of the
average commitment amount, regardless of usage, to The Bank of New York, which
acts as agent to the syndicate. Such commitment fees are allocated among the
funds based upon net assets and other factors. Interest on any revolving credit
loan is charged based upon the Federal Funds Advances rate. There were no
borrowings made or outstanding on the line of credit during the year ended
October 31, 2007.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2007, purchases and sales of securities, other
than short-term securities, were $944,625 and $1,134,953, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 954 $ 33,360
Shares redeemed (5,030) (174,626)
-----------------
Net decrease in shares outstanding
before conversion (4,076) (141,266)
Shares converted from Class B (See Note
1) 1,953 68,547
-----------------
Net decrease (2,123) $ (72,719)
=================
Year ended October 31, 2006:
Shares sold 3,307 $ 104,530
Shares redeemed (4,683) (149,012)
-----------------
Net decrease in shares outstanding
before conversion (1,376) (44,482)
-----------------
Shares converted from Class B (See Note
1) 15,588 498,514
-----------------
Net increase 14,212 $ 454,032
=================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 859 $ 22,356
Shares redeemed (3,126) (93,236)
-------------------
Net decrease in shares outstanding
before conversion (2,267) (70,880)
Shares reacquired upon conversion into
Class A (See Note 1) (2,157) (68,547)
-------------------
Net decrease (4,424) $(139,427)
===================
Year ended October 31, 2006:
Shares sold 1,100 $ 32,002
Shares redeemed (6,728) (194,560)
-------------------
Net decrease in shares outstanding
before conversion (5,628) (162,558)
Shares reacquired upon conversion into
Class A (See Note 1) (17,032) (498,514)
-------------------
Net decrease (22,660) $(661,072)
===================
</Table>
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 20 $ 626
----------------
Shares redeemed (66) (2,050)
----------------
Net decrease (46) $(1,424)
----------------
Year ended October 31, 2006:
Shares sold 26 $ 762
----------------
Shares redeemed (83) (2,418)
----------------
Net decrease (57) $(1,656)
----------------
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 42 $ 1,506
----------------
Shares redeemed (3) (136)
----------------
Net increase 39 $ 1,370
----------------
Year ended October 31, 2006:
Shares sold 48 $ 1,577
----------------
Shares redeemed (48) (1,486)
----------------
Net increase --(a) $ 91
----------------
</Table>
(a) Less than one thousand.
NOTE 9--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission ("SEC") and the New York State
Attorney General, and, as noted in the notes to the year-end 2004, 2005 and 2006
financial statements of each fund of the Trust, NYLIM was previously a party to
arrangements with certain registered representatives of broker-dealers relating
to the level of trading by clients of those registered representatives in shares
of certain funds of the Trust. All such arrangements were terminated by the
fourth quarter of 2003.
NYLIM and the Trustees of the Trust undertook a review of the possible dilutive
effects that transactions under those arrangements and certain other levels of
trading by Fund shareholders over the period from 1999 to 2003 may have had on
the funds. As a result of this review, in December 2005, NYLIM made payments
totaling $5.882 million to nine MainStay funds. The amount paid to the MainStay
Capital Appreciation Fund was $3,205,000. NYLIM has reimbursed or paid all
expenses relating to the Board of Trustees' review of this matter.
In a separate matter, in 2004 the SEC raised concerns relating to a guarantee
provided to shareholders of the MainStay Equity Index Fund and the fees and
expenses of that Fund as well as the related guarantee disclosure to that fund's
shareholders. Discussions have been held with the SEC concerning a possible
resolution of this matter. There can be no assurance of the outcome of these
efforts.
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS:
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes", an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation becomes effective for the Fund's 2008 fiscal
year, and is to be applied to all open tax years as of the date of
effectiveness. Based on Management's analysis, the determination has been made
that the adoption of the interpretation on November 1, 2007, did not have an
impact on the Fund's financial statements upon adoption. Management continually
reviews the Fund's tax positions and such conclusions under the Interpretation
based on factors, including, but not limited to, ongoing analyses of tax laws,
regulations and interpretations, thereof.
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The changes to current generally accepted accounting
principles from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures
about fair value measurements. As of October 31, 2007, the Fund does not believe
the adoption of SFAS No. 157 will impact the amounts reported in the Fund's
financial statements. However, additional disclosures may be required about the
inputs used to develop the measurements and the effect of certain measurements
reported in the financial statements for a fiscal period.
22 MainStay Capital Appreciation Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Capital Appreciation Fund ("the
Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2007, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years or periods in the
four-year period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits. The financial highlights for the periods presented through
October 31, 2003, were audited by other auditors, whose report dated December
18, 2003, expressed an unqualified opinion thereon.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2007, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Capital Appreciation Fund of The MainStay Funds as of October 31, 2007,
the results of its operations for the year then ended, the changes in its net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years or periods in the four-year period
then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 20, 2007
www.mainstayfunds.com 23
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with New York Life Investment Management LLC (the "Manager") and the
Subadvisory Agreement between the Manager and MacKay Shields LLC, a wholly-owned
indirect subsidiary of New York Life Investment Management Holdings LLC, an
affiliate of the Manager, (the "Subadvisor"), (each an "Agreement") at a meeting
held on May 22 and 23, 2007. In connection with the approval of each Agreement,
the Trustees reviewed a significant amount of a wide variety of information that
they had requested and received from the Manager and the Subadvisor, and data
and analysis from an outside data provider and a third party consultant. The
Trustees considered various industry trends and regulatory developments in their
deliberations. In considering approval of each Agreement, and in evaluating the
fairness of the compensation to be paid by the Fund, the Trustees met both as a
full Board and in executive session with no Interested Trustee present, in
advance of the meeting at which the Agreements were approved, and they
considered a number of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and the Subadvisor have provided historically to the Fund, and
also generally to other series of the Trust. Among other services, the Manager's
services have included investment management services, including monitoring and
evaluating the Subadvisor's investment program and investment results with
respect to the Fund, and the Subadvisor's compliance with the Fund's investment
policies and restrictions, and administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets,
and its other services include, among other services, providing reports to the
Manager and reviewing certain aspects of Fund filings. The Trustees considered,
among other things, the Manager's and Subadvisor's management, personnel,
resources, operations and portfolio management capabilities. The Board reviewed
reports on the Subadvisor's brokerage practices, including with respect to best
execution of portfolio trades. The Trustees considered the Manager's supervision
of the Fund's service providers and its attention to the compliance program of
the Trust, the Manager, the Subadvisor and certain other service providers, as
well as the Subadvisor's attention to its compliance program. The Trustees noted
the generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's underperformance over
various time periods reviewed.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information that indicated that the profitability to the Manager and its
affiliates from the Management Agreement with respect to the Fund was moderate,
and from the overall relationship with the Trust was low. The Trustees
considered other benefits that the Manager and its affiliates receive from the
relationship with the Trust, including benefits that NYLIFE Distributors and
MainStay Shareholder Services receive in exchange for services they provide to
the Funds, and certain benefits from soft dollar arrangements. The Trustees
acknowledged certain benefits to the reputation of the Manager and the Trust
from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They considered that, across the Trust
(though not every series or share class), gross transfer agency fees tended to
be relatively high and, therefore, adversely affected gross expense ratios.
Noting that the Trust historically permitted smaller investor accounts, the
Trustees considered measures that had been recently implemented that were
intended to increase the average size of shareholder accounts, including
generally higher investment minimums and small account fees, and the Trustees
considered potential benefits to the Manager and its affiliates arising from
such measures.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the Manager's willingness to implement
contractual breakpoints that would reduce the Fund's management fee at levels
above the breakpoints, and the fact that the breakpoints were intended to
provide that shareholders
24 MainStay Capital Appreciation Fund
would share in benefits from economies of scale obtained through the growth in
the Fund's assets. The Trustees noted that the Fund's management fee rate had
been reduced by the breakpoint schedule applicable to the Fund, although they
also noted that the Fund's asset size had decreased over the past several years.
The Trustees reviewed information about the potential effect of asset growth on
Fund expenses, the difficulty of forecasting its effect on the profitability of
the Manager and its affiliates, and the management fee breakpoints applicable to
the Fund and certain other funds.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by the
Fund, the Trustees evaluated factors such as the fees and expenses borne by
other registered funds in the market pursuing strategies generally similar to
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager including other registered funds and separate
institutional accounts having investment strategies similar to that of the Fund,
and took account of explanations and other information relating to the fees and
expenses of those other funds and accounts. The Trustees considered the current
and proposed contractual and net management fees, its anticipated gross and net
expense ratio, and various components of the expense ratio, in comparison to
other funds in comparison groupings. The Trustees generally acknowledged the
historical relationships among the Manager, the Subadvisor and the Trust and the
likely difficulties in implementing an alternative to the investment management
arrangement between the Trust and the Manager.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings, with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. This summary set out
above describes the most important, but not all, of the factors considered by
the Trustees in considering each Agreement. On the basis of their review, a
majority of the Trustees and a majority of the Non-Interested Trustees concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the judgment of a
majority of the Trustees and a majority of the Non-Interested Trustees that
approval of each Agreement was in the best interests of the Fund and its
shareholders.
www.mainstayfunds.com 25
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
or (iii) on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 1-800-MAINSTAY (1-800-624-6782). You also can obtain and review copies
of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC
(information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330).
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of The MainStay Funds (the
"Trust") was held on May 4, 2007, at the offices of New York Life Investment
Management LLC in Parsippany, New Jersey. The purpose of the meeting was to
elect the following individuals to the Board of Trustees of the Trust:
- Susan B. Kerley
- Alan R. Latshaw
- Peter Meenan
- Richard H. Nolan, Jr.
- Richard S. Trutanic
- Roman L. Weil
- John A. Weisser
- Brian A. Murdock (Interested Trustee)
There are no other Trustees of the Trust.
No other business came before the special meeting. The proposal to elect
Trustees was passed by the shareholders of the Fund as shown below:
<Table>
<Caption>
CAPITAL
APPRECIATION VOTES VOTES
FUND FOR WITHHELD ABSTENTIONS TOTAL
Susan B.
Kerley 8,157,999.107 134,410.017 9,602.000 8,302,011.124
- ------------------------------------------------------------------------
Alan R.
Latshaw 8,174,089.307 118,319.817 9,602.000 8,302,011.124
- ------------------------------------------------------------------------
Peter Meenan 8,160,080.043 132,329.081 9,602.000 8,302,011.124
- ------------------------------------------------------------------------
Richard H.
Nolan, Jr. 8,176,947.965 115,461.159 9,602.000 8,302,011.124
- ------------------------------------------------------------------------
Richard S.
Trutanic 8,161,315.920 131,093.204 9,602.000 8,302,011.124
- ------------------------------------------------------------------------
Roman L. Weil 8,157,912.954 134,496.170 9,602.000 8,302,011.124
- ------------------------------------------------------------------------
John A.
Weisser 8,176,561.247 115,847.877 9,602.000 8,302,011.124
- ------------------------------------------------------------------------
Brian A.
Murdock 8,158,920.305 133,488.819 9,602.000 8,302,011.124
- ------------------------------------------------------------------------
</Table>
This resulted in approval of the proposal.
26 MainStay Capital Appreciation Fund
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Pursuant to
notice, a Special Meeting of Shareholders of the Trust was held on May 4, 2007,
at NYLIM's offices in Parsippany, New Jersey. The Trustees listed below were
elected to serve the Trust effective June 7, 2007.
Each Trustee serves until his or her successor is elected and qualified or until
his or her resignation, death or removal. The Retirement Policy provides that a
Trustee shall tender his or her resignation upon reaching age 72. A Trustee
reaching the age of 72 may continue for additional one-year periods with the
approval of the Board's Nominating and Governance Committee, except that no
Trustee shall serve on the Board past his or her 75th birthday. Officers serve a
term of one year and are elected annually by the Trustees. The business address
of each Trustee and officer listed below is 51 Madison Avenue, New York, New
York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF FUNDS
POSITION(S) HELD IN FUND COMPLEX
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
BRIAN A. MURDOCK Indefinite; Member of the Board of Managers 73 Trustee, Eclipse Funds since
3/14/56 Trustee and Chief and President (since 2004) and June, 2007 (3 funds); Director,
Executive Officer Chief Executive Officer (since Eclipse Funds Inc. since June
since 2006 2006), New York Life Investment 2007 (22 funds); Director,
Management LLC and New York MainStay VP Series Fund, Inc.,
Life Investment Management since 2006 (24 portfolios);
Holdings LLC; Senior Vice Director, ICAP Funds, Inc.,
President, New York Life since 2006 (3 funds)
Insurance Company (since 2004);
Chairman of the Board and
President, NYLIFE Distributors
LLC (since 2004); Member of the
Board of Managers, NYLCAP
Manager LLC and Madison Capital
Funding LLC (since 2004),
MacKay Shields LLC and
Institutional Capital LLC
(since 2006), and McMorgan &
Company LLC (since 2007); Chief
Executive Officer, Eclipse
Funds and Eclipse Funds Inc.
(since 2006); Chairman (2006 to
2007) and Director and Chief
Executive Officer (since 2006),
MainStay VP Series Fund, Inc.;
Director and Chief Executive
Officer, ICAP Funds, Inc.
(since 2006); Chief Investment
Officer, MLIM Europe and Asia
(2001 to 2003); President of
Merrill Japan and Chairman of
MLIM's Pacific Region (1999 to
2001)
-----------------------------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow Capital
Management, Inc., McMorgan & Company LLC, NYLIFE Securities Inc. and/or NYLIFE
Distributors LLC, as described in detail above in the column "Principal
Occupation(s) During Past Five Years."
www.mainstayfunds.com 27
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. KERLEY Indefinite; Partner, Strategic Management 73 Chairman since 2005 and Trustee
8/12/51 Chairman and Advisors LLC (since 1990) since 2000, Eclipse Funds (3
Trustee since funds); Chairman since 2005 and
June 2007 Director since 1990, Eclipse
Funds Inc. (22 funds); Chairman
and Director, ICAP Funds, Inc.,
since 2006 (3 funds); Chairman
and Director, MainStay VP
Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
Legg Mason Partners Funds,
Inc., since 1991 (30
portfolios)
----------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & Young 73 Trustee, Eclipse Funds since
3/27/51 Trustee and Audit LLP (2002 to 2003); Partner, June 2007 (3 funds); Director,
Committee Arthur Andersen LLP (1989 to Eclipse Funds Inc. since June
Financial Expert 2002); Consultant to the Audit 2007 (22 funds); Director, ICAP
since 2006 and Compliance Committee of The Funds, Inc., since June 2007 (3
MainStay Funds (2004 to 2006) funds); Director, MainStay VP
Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
State Farm Associates Funds
Trusts since 2005 (3
portfolios); Trustee, State
Farm Mutual Fund Trust since
2005 (15 portfolios); Trustee,
State Farm Variable Product
Trust since 2005 (9 portfolios)
----------------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds since
12/5/41 Trustee since President and Chief Executive 2002 (3 funds); Director,
June 2007 Officer, Babson-United, Inc. Eclipse Funds Inc. since 2002
(financial services firm) (2000 (22 funds); Director, ICAP
to 2004); Independent Funds, Inc.,
Consultant (1999 to 2000); Head since 2006 (3 funds); Director,
of Global Funds, Citicorp (1995 MainStay VP Series Fund, Inc.,
to 1999) since June 2007 (24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 73 Trustee, Eclipse Funds since
NOLAN, JR. Trustee since Management; President--Shields/ June 2007 (3 funds); Director,
11/16/46 June 2007 Alliance, Alliance Capital Eclipse Funds Inc. since June
Management (1994 to 2004) 2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 2006
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman (since 1990) and Chief 73 Trustee, Eclipse Funds since
TRUTANIC Trustee since Executive Officer (1990 to June 2007 (3 funds); Director,
2/13/52 1994 1999), Somerset Group Eclipse Funds Inc. since June
(financial advisory firm); 2007 (22 funds); Director, ICAP
Managing Director and Advisor, Funds, Inc., since June 2007 (3
The Carlyle Group (private funds); Director, MainStay VP
investment firm) (2002 to Series Fund, Inc., since June
2004); Senior Managing Director 2007 (24 portfolios)
and Partner, Groupe Arnault
S.A. (private investment firm)
(1999 to 2002)
----------------------------------------------------------------------------------------------------------------------
</Table>
28 MainStay Capital Appreciation Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEE
ROMAN L. WEIL Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds since
5/22/40 Trustee and Audit Accounting, Graduate School of June 2007 (3 funds); Director,
Committee Business, University of Eclipse Funds Inc. since June
Financial Expert Chicago; President, Roman L. 2007 (22 funds); Director, ICAP
since June 2007 Weil Associates, Inc. Funds, Inc., since June 2007 (3
(consulting firm) funds); Director, MainStay VP
Series Fund, Inc., since 1994
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 73 Trustee, Eclipse Funds since
10/22/41 Trustee since Salomon Brothers, Inc. (1971 to June 2007 (3 funds); Director,
June 2007 1995) Eclipse Funds Inc. since June
2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 1997
(24 portfolios); Trustee,
Direxion Funds (69 funds) and
Direxion Insurance Trust (45
funds) since March 2007
----------------------------------------------------------------------------------------------------------------------
</Table>
Terry L. Lierman resigned as Trustee of the Trust effective May 31, 2007. Edward
J. Hogan, John B. McGuckian and Donald E. Nickelson resigned as Trustees of the
Trust effective June 7, 2007.
At a meeting of the Board of Trustees held on June 7 and 8, 2007, the following
individuals were appointed to serve as Officers of the Trust effective June 7,
2007:
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ROBERT A. Chief Legal Senior Managing Director, General Counsel and Secretary, New
ANSELMI Officer since York Life Investment Management LLC (including predecessor
10/19/46 2004 advisory organizations) (since 2000); Secretary (since 2001)
and General Counsel (since 2004), New York Life Investment
Management Holdings LLC; Senior Vice President, New York
Life Insurance Company (since 2000); Vice President and
Secretary, McMorgan & Company LLC (since 2001); Secretary,
NYLIM Service Company LLC (since 2005), NYLCAP Manager LLC
(since 2004), Madison Capital Funding LLC (since 2002), and
Institutional Capital LLC (since 2006); Chief Legal Officer,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), McMorgan Funds (since 2005) and
ICAP Funds, Inc. (since 2006); Managing Director and Senior
Counsel, Lehman Brothers Inc. (1998 to 1999); General
Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998)
-------------------------------------------------------------------------------------------------
JACK R. Treasurer and Managing Director, New York Life Investment Management LLC
BENINTENDE Principal (since June 2007); Treasurer and Principal Financial and
5/12/64 Financial and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
Accounting MainStay VP Series Fund, Inc., and ICAP Funds, Inc. (since
Officer since June 2007); Vice President, Prudential Investments (2000 to
June 2007 2007); Assistant Treasurer, JennisonDryden Family of Funds,
Target Portfolio Trust, The Prudential Series Fund and
American Skandia Trust (2006 to 2007); Treasurer and
Principal Financial Officer, The Greater China Fund (2007)
-------------------------------------------------------------------------------------------------
STEPHEN P. President since Senior Managing Director and Chief Marketing Officer, New
FISHER March 2007 York Life Investment Management LLC (since 2005); Managing
2/22/59 Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since March 2007); Managing Director, UBS
Global Asset Management (1999 to 2003)
-------------------------------------------------------------------------------------------------
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration predecessor advisory organizations) (since 2000); Executive
2/8/59 since 2005 Vice President, New York Life Trust Company (since 2006);
Vice President--Administration, Eclipse Funds, Eclipse Funds
Inc. and MainStay VP Series Fund, Inc. (since 2005) and ICAP
Funds, Inc. (since 2006)
-------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 29
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Senior Managing Director and Chief Compliance Officer (since
MICUCCI President and 2006) and Managing Director and Chief Compliance Officer
12/16/65 Chief Compliance (2003 to 2006), New York Life Investment Management LLC and
Officer since New York Life Investment Management Holdings LLC; Senior
2006 Managing Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE Distributors
LLC; Chief Compliance Officer, NYLCAP Manager LLC (since
2006); Senior Vice President and Chief Compliance Officer,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund,
Inc., and ICAP Funds, Inc. (since 2006); Vice President--
Compliance, Eclipse Funds, Eclipse Funds Inc. and MainStay
VP Series Fund, Inc. (2004 to 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002)
-------------------------------------------------------------------------------------------------
MARGUERITE E.H. Secretary since Managing Director and Associate General Counsel, New York
MORRISON* 2004 Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC (since
2005); Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP Funds,
Inc. (since 2006); Chief Legal Officer--Mutual Funds and
Vice President and Corporate Counsel, The Prudential
Insurance Company of America (2000 to 2004)
-------------------------------------------------------------------------------------------------
</Table>
* In addition to serving as Secretary to the Trust, effective January 1, 2008,
Marguerite E.H. Morrison will assume the role of Chief Legal Officer to the
Trust.
Arphiela Arizmendi resigned as Treasurer and Principal Financial and Accounting
Officer of the Trust effective June 7, 2007.
Christopher O. Blunt resigned as President of the Trust effective March 12,
2007.
Alan J. Kirshenbaum resigned as Senior Vice President of the Trust effective
March 19, 2007.
30 MainStay Capital Appreciation Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay 130/30 Core Fund
MainStay 130/30 Growth Fund
MainStay All Cap Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay 130/30 High Yield Fund(2)
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Institutional Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Principal Preservation Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay 130/30 International Fund
MainStay Global High Income Fund
MainStay ICAP International Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
RETIREMENT FUNDS
MainStay Retirement 2010 Fund
MainStay Retirement 2020 Fund
MainStay Retirement 2030 Fund
MainStay Retirement 2040 Fund
MainStay Retirement 2050 Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
New York, New York
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
Chicago, Illinois
MACKAY SHIELDS LLC(3)
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
MCMORGAN & COMPANY LLC(3)
San Francisco, California
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
(NEW YORK LIFE INVESTMENT MANAGEMENT LLC LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2007 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO11872 (RECYCLE LOGO) MS329-07 MSCA11-12/07
04
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
COMMON STOCK FUND
Message from the President
and
Annual Report
October 31, 2007
MESSAGE FROM
THE PRESIDENT
The 12-month period ended October 31, 2007, was a dynamic one for mutual fund
investors. U.S. equity markets generally advanced, with growth stocks out-
performing value stocks at all capitalization levels. Although past performance
is no guarantee of future results, international stocks as a whole provided even
stronger returns for U.S. investors.
The progress of the equity markets, however, was far from steady. In February,
weakness in Asian markets led to sharp price declines around the globe. The
correction caused many investors to reconsider whether China and other emerging
economies could sustain their rapid growth. Fortunately, strong
corporate-earnings reports and positive economic news helped the stock market
regain its footing.
In July and August, difficulties in the subprime-mortgage market led to another
stock-market correction. A number of high-profile mortgage originators either
closed their doors or were sold to larger entities. Other leading financial
services firms faced major write-offs because of subprime-mortgage exposure.
The Federal Open Market Committee (FOMC) took prompt action to increase
liquidity and stabilize the financial markets by lowering the discount rate and
the federal funds target rate during the reporting period. These Federal Reserve
moves helped calm investor concerns, and the stock market generally advanced
from August 16, 2007, the date of an unscheduled FOMC meeting, through the end
of October 2007.
Difficulties in the subprime-mortgage market led to a "flight to quality," or a
general movement toward fixed-income securities that carry lower risk. As demand
for short- and intermediate-term Treasury securities increased, yields fell
across much of the maturity spectrum. Yields rose, however, on 20-and 30-year
Treasury bonds, and the yield curve steepened during the 12-month reporting
period.
High-yield bonds rallied from November 2006 through May 2007. But in June and
July, the yield differences--or spreads--between high-yield bonds and comparable
Treasury securities began to widen. At the end of October 2007, these spreads
were wider than when the reporting period began, making high-yield securities
more attractive to investors willing to accept higher risk.
To help investors address the challenges of today's ever-changing markets, New
York Life Investment Management LLC provides access to seven institutional
investment boutiques, each with its own proprietary research and investment
culture. As advisors and subadvisors to MainStay Funds, these boutiques bring a
wealth of experience and market insight to our shareholders. The portfolio
managers of each MainStay Fund seek to consistently apply time-tested investment
principles across a wide variety of market environments.
The report that follows provides more specific information about the market
forces and investment decisions that affected your investment in MainStay Funds
from November 1, 2006, through October 31, 2007. Please read the report
carefully. As you do, bear in mind that this annual report reflects just a short
segment of your lifetime investment journey. We look forward to continuing to
work with you, wherever that journey may lead.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
COMMON STOCK FUND
MainStay Funds
Annual Report
October 31, 2007
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 16
- --------------------------------------------------------------------------------
Notes to Financial Statements 22
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 27
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 28
- --------------------------------------------------------------------------------
Federal Income Tax Information 30
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 30
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 30
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 30
- --------------------------------------------------------------------------------
Trustees and Officers 31
</Table>
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT
MONTH-END PERFORMANCE INFORMATION, PLEASE CALL 1-800-MAINSTAY (1-800-624-6782)
OR VISIT WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 6.07% 10.93% 4.99%
Excluding sales charges 12.24 12.19 5.62
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
CLASS A S&P 500 INDEX RUSSELL 1000 INDEX
------- ------------- ------------------
6/01/98 9450 10000 10000
9894 10133 10036
12606 12734 12603
14580 13510 13744
10706 10146 10166
8902 8613 8681
10255 10404 10619
10946 11385 11609
12106 12378 12825
14095 14400 14880
10/31/07 15821 16497 17117
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 6.39% 11.11% 4.84%
Excluding sales charges 11.39 11.38 4.84
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
CLASS B S&P 500 INDEX RUSSELL 1000 INDEX
------- ------------- ------------------
6/01/98 10000 10000 10000
10430 10133 10036
13200 12734 12603
15149 13510 13744
11038 10146 10166
9108 8613 8681
10418 10404 10619
11038 11385 11609
12124 12378 12825
14013 14400 14880
10/31/07 15609 16497 17117
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 10.47% 11.38% 4.84%
Excluding sales charges 11.47 11.38 4.84
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
CLASS C S&P 500 INDEX RUSSELL 1000 INDEX
------- ------------- ------------------
6/01/98 10000 10000 10000
10430 10133 10036
13200 12734 12603
15149 13510 13744
11038 10146 10166
9108 8613 8681
10408 10404 10619
11038 11385 11609
12124 12378 12825
14003 14400 14880
10/31/07 15609 16497 17117
</Table>
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect maximum applicable sales charges explained in this paragraph, change in
share price, and reinvestment of dividend and capital-gain distributions. The
graphs assume an initial investment of $10,000 and reflect the deduction of all
sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase and have an annual 12b-1 fee of 1.00%.
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee and are generally available to corporate and institutional investors
with a minimum initial investment of $5 million. Performance figures reflect
certain fee waivers and/or expense limitations, without which total returns may
have been lower. These fee waivers and/or expense limitations are contractual
and may be modified
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
13.03% 12.72% 6.01%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
CLASS I S&P 500 INDEX RUSSELL 1000 INDEX
------- ------------- ------------------
6/1/98 10000.00 10000.00 10000.00
10478.00 10133.00 10036.00
13384.00 12734.00 12603.00
15517.00 13510.00 13744.00
11422.00 10146.00 10166.00
9523.00 8613.00 8681.00
10999.00 10404.00 10619.00
11773.00 11385.00 11609.00
13083.00 12378.00 12825.00
15332.00 14400.00 14880.00
10/31/07 17331.00 16497.00 17117.00
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
- --------------------------------------------------------------
S&P 500(R) Index(1) 14.56% 13.88% 5.46%
Russell 1000(R) Index(2) 15.03 14.54 5.87
Average Lipper large-cap core
fund(3) 14.56 12.58 4.77
</Table>
or terminated only with the approval of the Board of Trustees. The Manager may
recoup the amount of certain management fee waivers or expense reimbursements
from the Fund pursuant to the contract if such action does not cause the Fund to
exceed existing expense limitations and the recoupment is made within three
years after the year in which the Manager incurred the expense. From inception
(6/1/98) through 8/31/98, performance for Class C shares (first offered 9/1/98)
includes the historical performance of Class B shares adjusted to reflect the
applicable CDSC for fees, estimated expenses and fee waivers/expense limitations
of Class C shares upon initial offer. From inception through 12/27/04,
performance of Class I shares (first offered 12/28/04) includes the historical
performance of Class A shares adjusted to reflect the applicable sales charge
(or CDSC), fees, estimated expenses and fee waivers/expense limitations of Class
I shares upon initial offer. Unadjusted, performance shown for the newer classes
of shares might have been lower.
1. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500(R)
Index is an unmanaged index and is widely regarded as the standard for
measuring large-cap U.S. stock-market performance. Results assume
reinvestment of all income and capital gains. The S&P 500(R) Index is
considered to be the Fund's broad-based securities-market index for
comparison purposes. An investment cannot be made directly in an index.
2. The Russell 1000(R) Index is an unmanaged index that mea-sures the
performance of the 1,000 largest U.S. companies based on total market
capitalization. Results assume reinvestment of all income and capital gains.
An investment cannot be made directly in an index.
3. Lipper Inc. is an independent monitor of fund performance. Results are based
on total returns with all dividend and capital gain distributions reinvested.
THE DISCLOSURE ON THE PRECEDING PAGE IS AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Common Stock Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY COMMON STOCK FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2007, to October 31, 2007,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1,
2007, to October 31, 2007.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six-months ended October 31, 2007. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/07 10/31/07 PERIOD(1) 10/31/07 PERIOD(1)
CLASS A SHARES $1,000.00 $1,037.75 $ 6.63 $1,018.55 $ 6.56
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,034.10 $10.46 $1,014.80 $10.36
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,034.10 $10.46 $1,014.80 $10.36
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,041.30 $ 3.19 $1,021.90 $ 3.16
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's net annualized expense ratio of each class
(1.29% for Class A, 2.04% for Class B and Class C, and 0.62% for Class I)
multiplied by the average account value over the period, divided by 365 and
multiplied by 184 (to reflect the one-half year period).
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2007
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 97.6
Short-Term Investment (collateral from securities lending is 5.9
5.9%)
Investment Company 2.2
Liabilities in Excess of Cash and Other Assets (5.7)
</Table>
* Includes 5.9% of Short-Term Investment Company Securities.
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2007 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. ExxonMobil Corp.
2. Microsoft Corp.
3. General Electric Co.
4. S&P 500 Index--SPDR Trust Series 1
5. Citigroup, Inc.
6. Pfizer, Inc
7. International Business Machines Corp.
8. Procter & Gamble Co. (The)
9. Verizon Communications, Inc.
10. ConocoPhillips
</Table>
8 MainStay Common Stock Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Harvey Fram, CFA, of New York Life
Investment Management LLC
HOW DID MAINSTAY COMMON STOCK FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2007?
Excluding all sales charges, MainStay Common Stock Fund returned 12.24% for
Class A shares, 11.39% for Class B shares and 11.47% for Class C shares for the
12 months ended October 31, 2007. Over the same period, the Fund's Class I
shares returned 13.03%. All share classes underperformed the 14.56% return of
the average Lipper(1) large-cap core fund and the 14.56% return of the S&P
500(R) Index,(2) for the 12-months ended October 31, 2007. The S&P 500(R) Index
is the Fund's broad-based securities-market index. See page 5 for Fund returns
with sales charges.
DURING THE REPORTING PERIOD, WHICH SECTORS MADE THE STRONGEST CONTRIBUTIONS TO
THE FUND'S PERFORMANCE AND WHICH SECTORS WERE WEAK?
The sectors that made the greatest positive contri-butions to the Fund's
performance relative to the S&P 500(R) Index were financials, materials and
energy. The Fund generally had underweight positions in the financial stocks
that had the greatest exposure to the mortgage crisis, such as Countrywide
Financial. The Fund enjoyed overweight positions in materials stocks that
benefitted from rising commodity prices. Significant exposure to energy stocks
also helped performance when the price of oil climbed to new highs.
Information technology, consumer discretionary and health care were the Fund's
weakest-performing sectors relative to the S&P 500(R) Index. The Fund maintained
an overweight position in information technology, which was one of the
best-performing sectors during the reporting period. Unfortunately, underweight
positions in strong performers such as Apple and Google detracted from the
Fund's relative results. An overweight position in the consumer discretionary
sector hurt performance when many of the Fund's holdings were adversely affected
by a slowdown in construction and by difficulties in the subprime mortgage
market. In the health care sector, significant exposure to a number of managed
health care stocks, including UnitedHealth Group, hurt performance.
WHICH INDIVIDUAL STOCKS WERE THE STRONGEST CONTRIBUTORS TO THE FUND'S
PERFORMANCE DURING THE REPORTING PERIOD?
The three strongest individual contributors to the Fund's performance during the
reporting period were Freeport-McMoRan, National Oilwell Varco and Cummins.
Freeport-McMoRan, a copper and gold mining company, benefited from the rising
price of copper. National Oilwell Varco, an oil & gas equipment & services
company, performed well, as the rising price of oil caused demand for the
company's products to soar. Cummins, a manufacturer of engines and related
technologies, saw its stock price rise as its clean diesel technology catapulted
the company into a leadership position in its industry.
WHICH INDIVIDUAL STOCKS DETRACTED FROM THE FUND'S PERFORMANCE DURING THE
REPORTING PERIOD?
Major detractors from the Fund's performance during the reporting period were
Circuit City Stores and Lennar. Both companies were affected by the slowdown in
consumer spending. A sizable position in Merrill Lynch also hurt the Fund's
performance when it became clear that the company faced large losses on its
subprime mortgage exposure.
WHAT WERE SOME OF THE FUND'S PURCHASES AND SALES DURING THE REPORTING PERIOD?
The Fund seeks stocks with attractive valuations, reliable earnings and strong
price trends. Among the stocks purchased by the Fund during the reporting period
were Microsoft and EMC. Both of these stocks appeared reasonably valued, and
both were benefiting from continued strength in technology spending. Securities
that were sold during the reporting period included Kohl's and Regions
Financial. We sold Regions Financial to reduce the Fund's exposure to
financials, and we sold Kohl's to reduce exposure to the U.S. consumer.
DID THE FUND HAVE ANY SIGNIFICANT UNDERWEIGHT OR OVERWEIGHT POSITIONS AT THE END
OF THE REPORTING PERIOD?
Weighting changes in the Fund result from a combination of security performance
and the Fund's proprietary quantitative security-selection process.
The principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a certain rate that is generally higher than the rate
expected for nongrowth companies. If these expectations are not met, the market
price of the stock may decline significantly, even if earnings showed an
absolute increase. The Fund may experience a portfolio turnover rate of more
than 100% and may generate taxable short-term capital gains.
1. See footnote on page 6 for more information on the S&P 500(R) Index.
2. See footnote on page 6 for more information on Lipper Inc.
www.mainstayfunds.com 9
During the reporting period, the Fund's weightings in the financials and
consumer discretionary sectors decreased. The Fund's weightings in energy and
industrials increased.
As of October 31, 2007, the Fund was overweight relative to the S&P 500(R) Index
in Northern Trust, a bank that appeared to have little exposure to subprime
mortgages, and McKesson, a health care distributor that has benefited from the
move to keep health costs down.
At the end of October 2007, the Fund held underweight positions in Target, which
had been hurt by a slowdown in consumer spending, and in Comcast, which suffered
from competitive pressures. Despite continued strong performance, Apple and
Google were also underweight at the end of the reporting period because our
proprietary model found them expensive.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecast made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
10 MainStay Common Stock Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (97.6%)+
- -----------------------------------------------------------------------------
AEROSPACE & DEFENSE (2.8%)
Boeing Co. (The) 29,858 $ 2,943,700
Honeywell International, Inc. 22,363 1,350,949
Lockheed Martin Corp. 25,144 2,766,846
Raytheon Co. 22,813 1,451,135
------------
8,512,630
------------
AIR FREIGHT & LOGISTICS (0.5%)
FedEx Corp. 14,336 1,481,482
------------
AIRLINES (0.3%)
Southwest Airlines Co. 54,917 780,371
------------
AUTO COMPONENTS (0.1%)
BorgWarner, Inc. 3,180 336,158
------------
AUTOMOBILES (0.0%)++
Thor Industries, Inc. 43 2,064
------------
BEVERAGES (1.1%)
Coca-Cola Co. (The) 10,115 624,702
Coca-Cola Enterprises, Inc. 44,377 1,145,370
Pepsi Bottling Group, Inc. (The) 19,056 820,932
PepsiCo, Inc. 8,278 610,254
------------
3,201,258
------------
BUILDING PRODUCTS (0.3%)
Masco Corp. 37,884 912,240
------------
CAPITAL MARKETS (6.2%)
Ameriprise Financial, Inc. 34,199 2,153,853
Bank of New York Mellon Corp. (The) 56,421 2,756,166
Charles Schwab Corp. (The) 112,686 2,618,823
Goldman Sachs Group, Inc. (The) 5,200 1,289,184
Janus Capital Group, Inc. (a) 9,212 317,906
Lehman Brothers Holdings, Inc. 5,144 325,821
Merrill Lynch & Co., Inc. 41,548 2,742,999
Morgan Stanley 49,475 3,327,689
Northern Trust Corp. 41,856 3,147,990
------------
18,680,431
------------
CHEMICALS (0.6%)
Albemarle Corp. 2,347 112,093
Ashland, Inc. 8,265 485,321
Cabot Corp. 2,727 95,472
CF Industries Holdings, Inc. 692 60,827
Lubrizol Corp. (The) 7,294 495,117
Lyondell Chemical Co. 11,947 566,885
Terra Industries, Inc. (a)(b) 2,603 96,025
------------
1,911,740
------------
</Table>
<Table>
<Caption>
SHARES VALUE
COMMERCIAL BANKS (0.5%)
National City Corp. 2,585 $ 62,686
PNC Financial Services Group, Inc. 681 49,141
Wachovia Corp. 4,583 209,581
Wells Fargo & Co. 34,152 1,161,510
------------
1,482,918
------------
COMMERCIAL SERVICES & SUPPLIES (0.3%)
Allied Waste Industries, Inc. (a)(b) 24,649 311,563
ChoicePoint, Inc. (b) 5,020 197,386
Dun & Bradstreet Corp. (The) 3,138 303,915
------------
812,864
------------
COMMUNICATIONS EQUIPMENT (1.4%)
Cisco Systems, Inc. (b) 67,594 2,234,658
Juniper Networks, Inc. (b) 29,147 1,049,292
QUALCOMM, Inc. 18,427 787,386
------------
4,071,336
------------
COMPUTERS & PERIPHERALS (5.9%)
Apple, Inc. (b) 8,723 1,656,934
EMC Corp. (b) 138,242 3,509,964
Hewlett-Packard Co. 90,472 4,675,593
V International Business Machines Corp. 43,690 5,073,283
Lexmark International, Inc. Class A (a)(b) 13,940 585,341
Network Appliance, Inc. (b) 53,600 1,687,864
QLogic Corp. (b) 2,979 46,264
Western Digital Corp. (b) 19,739 511,635
------------
17,746,878
------------
CONSTRUCTION & ENGINEERING (1.5%)
Fluor Corp. 19,447 3,072,626
KBR, Inc. (b) 26,492 1,135,977
Quanta Services, Inc. (a)(b) 8,617 284,361
------------
4,492,964
------------
CONSUMER FINANCE (1.6%)
American Express Co. 14,149 862,382
Capital One Financial Corp. 36,249 2,377,572
Discover Financial Services 74,842 1,444,451
SLM Corp. 1,377 64,939
------------
4,749,344
------------
CONTAINERS & PACKAGING (0.3%)
Ball Corp. 5,746 284,887
Pactiv Corp. (b) 18,037 495,476
------------
780,363
------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -----------------------------------------------------------------------------
DIVERSIFIED CONSUMER SERVICES (0.1%)
Regis Corp. 723 $ 24,293
Sotheby's Holdings, Inc. Class A (a) 2,653 143,713
------------
168,006
------------
DIVERSIFIED FINANCIAL SERVICES (3.3%)
Bank of America Corp. 57,196 2,761,423
V Citigroup, Inc. 132,654 5,558,203
JPMorgan Chase & Co. 31,483 1,479,701
------------
9,799,327
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (2.9%)
AT&T, Inc. 84,817 3,544,502
CenturyTel, Inc. 2,569 113,164
Citizens Communications Co. 6,727 88,527
Embarq Corp. 3,540 187,337
V Verizon Communications, Inc. 103,457 4,766,264
------------
8,699,794
------------
ELECTRIC UTILITIES (0.8%)
Edison International 39,932 2,319,650
Entergy Corp. 289 34,642
------------
2,354,292
------------
ELECTRICAL EQUIPMENT (0.1%)
Rockwell Automation, Inc. 3,301 227,373
Thomas & Betts Corp. (a)(b) 3,131 175,367
------------
402,740
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.9%)
Arrow Electronics, Inc. (b) 16,901 675,702
Avnet, Inc. (b) 14,551 607,068
Molex, Inc. 2,905 82,967
Tektronix, Inc. 434 16,427
Tyco Electronics, Ltd. 35,317 1,259,757
------------
2,641,921
------------
ENERGY EQUIPMENT & SERVICES (3.5%)
Cameron International Corp. (b) 1,643 159,962
ENSCO International, Inc. (a) 21,952 1,218,116
Grant Prideco, Inc. (b) 1,498 73,642
Halliburton Co. 68,349 2,694,318
Helmerich & Payne, Inc. 2,645 83,635
Nabors Industries, Ltd. (b) 10,953 307,560
National Oilwell Varco, Inc. (b) 24,433 1,789,473
Patterson-UTI Energy, Inc. 16,408 327,176
Pride International, Inc. (b) 12,722 469,442
Schlumberger, Ltd. 8,140 786,080
Tidewater, Inc. (a) 6,033 329,824
Transocean, Inc. (b) 19,313 2,305,393
------------
10,544,621
------------
</Table>
<Table>
<Caption>
SHARES VALUE
FOOD & STAPLES RETAILING (0.2%)
Kroger Co. (The) 857 $ 25,187
Wal-Mart Stores, Inc. 9,841 444,912
------------
470,099
------------
FOOD PRODUCTS (0.5%)
Corn Products International, Inc. 2,106 89,589
Dean Foods Co. 5,386 149,569
General Mills, Inc. 22,160 1,279,297
J.M. Smucker Co. (The) 951 50,812
Tyson Foods, Inc. Class A (a) 4,564 72,111
------------
1,641,378
------------
GAS UTILITIES (0.2%)
AGL Resources, Inc. 1,300 51,389
ONEOK, Inc. 9,906 494,706
------------
546,095
------------
HEALTH CARE EQUIPMENT & SUPPLIES (0.5%)
Advanced Medical Optics, Inc. (a)(b) 1,488 40,846
Baxter International, Inc. 7,291 437,533
Covidien, Ltd. 22,247 925,475
Edwards Lifesciences Corp. (b) 674 33,848
------------
1,437,702
------------
HEALTH CARE PROVIDERS & SERVICES (6.8%)
Aetna, Inc. 45,930 2,579,888
AmerisourceBergen Corp. 26,587 1,252,514
Cardinal Health, Inc. 7,913 538,321
CIGNA Corp. 6,742 353,888
Coventry Health Care, Inc. (a)(b) 23,022 1,388,457
Health Net, Inc. (b) 11,827 634,045
Humana, Inc. (b) 24,927 1,868,279
Lincare Holdings, Inc. (a)(b) 5,877 204,343
McKesson Corp. 38,346 2,534,671
Medco Health Solutions, Inc. (b) 30,703 2,897,749
UnitedHealth Group, Inc. 65,251 3,207,087
WellCare Health Plans, Inc. (a)(b) 3,258 78,811
WellPoint, Inc. (b) 36,279 2,874,385
------------
20,412,438
------------
HOTELS, RESTAURANTS & LEISURE (0.4%)
Brinker International, Inc. 3,932 99,833
CBRL Group, Inc. 701 27,970
Darden Restaurants, Inc. (a) 5,629 242,047
Harrah's Entertainment, Inc. 3,978 351,059
Wendy's International, Inc. 13,762 478,367
------------
1,199,276
------------
HOUSEHOLD DURABLES (0.9%)
American Greetings Corp. Class A 2,090 55,051
Black & Decker Corp. 9,750 876,623
Centex Corp. (a) 11,520 288,691
D.R. Horton, Inc. 22,305 283,050
Harman International Industries, Inc. 516 43,447
</Table>
12 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -----------------------------------------------------------------------------
HOUSEHOLD DURABLES (CONTINUED)
KB Home (a) 8,335 $ 230,379
Lennar Corp. Class A (a) 20,635 471,510
M.D.C. Holdings, Inc. 29 1,175
Mohawk Industries, Inc. (a)(b) 1,596 136,203
NVR, Inc. (b) 316 150,337
Pulte Homes, Inc. (a) 8,431 125,116
------------
2,661,582
------------
HOUSEHOLD PRODUCTS (2.2%)
Kimberly-Clark Corp. 24,560 1,741,058
V Procter & Gamble Co. (The) 70,351 4,890,802
------------
6,631,860
------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (0.7%)
AES Corp. (The) (b) 99,267 2,125,306
------------
INDUSTRIAL CONGLOMERATES (3.2%)
V General Electric Co. 171,673 7,066,061
Teleflex, Inc. 4,154 304,114
Tyco International, Ltd. 58,383 2,403,628
------------
9,773,803
------------
INSURANCE (9.6%)
ACE, Ltd. 38,174 2,313,726
Aflac, Inc. 29,545 1,854,835
Allstate Corp. (The) 46,197 2,420,723
American Financial Group, Inc. 2,151 64,315
American International Group, Inc. 26,491 1,672,112
Aon Corp. 35,308 1,600,159
Assurant, Inc. 14,493 846,971
Chubb Corp. (The) 37,267 1,988,194
Everest Re Group, Ltd. 508 54,122
Fidelity National Financial, Inc. Class A 8,886 136,756
First American Corp. 1,126 33,893
Genworth Financial, Inc. Class A 31,143 850,204
Hartford Financial Services Group, Inc. (The) 20,726 2,011,044
HCC Insurance Holdings, Inc. 11,286 337,339
Lincoln National Corp. 44,009 2,744,841
Old Republic International Corp. 23,961 367,322
Principal Financial Group, Inc. 36,354 2,460,075
Prudential Financial, Inc. 21,832 2,111,591
Travelers Cos., Inc. (The) 49,961 2,608,464
W.R. Berkley Corp. 17,843 536,896
XL Capital, Ltd. Class A 27,352 1,967,976
------------
28,981,558
------------
INTERNET & CATALOG RETAIL (0.4%)
Expedia, Inc. (b) 8,111 264,905
IAC/InterActiveCorp. (b) 30,817 907,869
------------
1,172,774
------------
</Table>
<Table>
<Caption>
SHARES VALUE
INTERNET SOFTWARE & SERVICES (0.6%)
eBay, Inc. (b) 20,653 $ 745,573
Google, Inc. Class A (a)(b) 1,495 1,056,965
ValueClick, Inc. (b) 38 1,033
------------
1,803,571
------------
IT SERVICES (1.3%)
Acxiom Corp. 53 696
Affiliated Computer Services, Inc. Class A (b) 7,635 386,789
Computer Sciences Corp. (b) 25,668 1,498,755
Convergys Corp. (b) 17,813 326,512
CSG Systems International, Inc. (b) 375 7,699
DST Systems, Inc. (b) 2,643 223,889
Electronic Data Systems Corp. 74,191 1,601,784
------------
4,046,124
------------
LEISURE EQUIPMENT & PRODUCTS (0.3%)
Brunswick Corp. 3,742 83,484
Eastman Kodak Co. (a) 6,740 193,168
Hasbro, Inc. 13,869 413,990
Mattel, Inc. 9,222 192,648
------------
883,290
------------
LIFE SCIENCES TOOLS & SERVICES (0.2%)
Invitrogen Corp. (b) 7,360 668,803
------------
MACHINERY (1.2%)
AGCO Corp. (b) 9,664 576,748
Caterpillar, Inc. 37,128 2,770,120
Cummins, Inc. 2,076 249,037
Joy Global, Inc. 1,269 73,678
------------
3,669,583
------------
MEDIA (3.7%)
CBS Corp. Class B 29,222 838,671
Clear Channel Communications, Inc. 3,226 121,846
DIRECTV Group, Inc. (The) (b) 79,864 2,114,799
Dow Jones & Co., Inc. (a) 1,130 67,585
McGraw-Hill Cos., Inc. (The) 12,218 611,389
Omnicom Group, Inc. 37,996 1,937,036
Tribune Co. 1,973 59,703
Viacom, Inc. Class B (b) 59,502 2,456,838
Walt Disney Co. (The) 83,321 2,885,406
------------
11,093,273
------------
METALS & MINING (1.8%)
Freeport-McMoRan Copper & Gold, Inc. Class B 25,764 3,031,908
Nucor Corp. 11,480 711,990
United States Steel Corp. 15,128 1,632,311
------------
5,376,209
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -----------------------------------------------------------------------------
MULTILINE RETAIL (0.7%)
Big Lots, Inc. (a)(b) 15,759 $ 377,901
Dollar Tree Stores, Inc. (b) 10,671 408,699
Family Dollar Stores, Inc. (a) 18,596 471,409
Macy's, Inc. 24,311 778,681
------------
2,036,690
------------
MULTI-UTILITIES (0.3%)
NiSource, Inc. 520 10,634
Public Service Enterprise Group, Inc. 3,430 327,908
Sempra Energy 10,958 674,027
------------
1,012,569
------------
OFFICE ELECTRONICS (0.2%)
Xerox Corp. (b) 28,891 503,859
------------
OIL, GAS & CONSUMABLE FUELS (11.0%)
Apache Corp. 5,397 560,263
Chesapeake Energy Corp. 35,730 1,410,620
Chevron Corp. 41,668 3,813,039
Cimarex Energy Co. 7,422 300,665
V ConocoPhillips 55,470 4,712,731
Devon Energy Corp. 27,163 2,537,024
V ExxonMobil Corp. 121,907 11,214,225
Frontier Oil Corp. 6,149 281,563
Marathon Oil Corp. 24,094 1,424,678
Noble Energy, Inc. 10,302 788,515
Occidental Petroleum Corp. 41,281 2,850,453
Overseas Shipholding Group, Inc. 78 5,803
Plains Exploration & Production Co. (b) 914 46,568
Pogo Producing Co. 1,380 82,193
Sunoco, Inc. 2,189 161,110
Tesoro Corp. 5,438 329,162
Valero Energy Corp. 37,551 2,644,717
------------
33,163,329
------------
PERSONAL PRODUCTS (0.0%)++
Alberto-Culver Co. 110 2,859
------------
PHARMACEUTICALS (3.3%)
Endo Pharmaceuticals Holdings, Inc. (b) 14,630 428,659
Forest Laboratories, Inc. (b) 5,557 217,112
Johnson & Johnson 32,010 2,086,092
King Pharmaceuticals, Inc. (b) 36,195 383,667
Merck & Co., Inc. 10,424 607,302
V Pfizer, Inc. 221,504 5,451,213
Schering-Plough Corp. 11,289 344,540
Watson Pharmaceuticals, Inc. (b) 15,207 464,726
------------
9,983,311
------------
</Table>
<Table>
<Caption>
SHARES VALUE
REAL ESTATE INVESTMENT TRUSTS (0.0%)++
Cousins Properties, Inc. 20 $ 576
------------
REAL ESTATE MANAGEMENT & DEVELOPMENT (0.1%)
Jones Lang LaSalle, Inc. 1,943 185,226
------------
ROAD & RAIL (0.5%)
Avis Budget Group, Inc. (b) 3,464 72,294
Con-Way, Inc. 1,520 64,767
CSX Corp. 17,864 799,771
Norfolk Southern Corp. 3,006 155,260
Ryder System, Inc. 5,370 256,955
YRC Worldwide, Inc. (b) 65 1,598
------------
1,350,645
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (2.8%)
Analog Devices, Inc. 22,899 766,201
Applied Materials, Inc. 113,721 2,208,462
Atmel Corp. (b) 1,327 6,489
Intel Corp. 80,267 2,159,182
Lam Research Corp. (b) 10,538 529,008
MEMC Electronic Materials, Inc. (b) 8,068 590,739
Micrel, Inc. 81 733
Micron Technology, Inc. (a)(b) 12,444 130,786
National Semiconductor Corp. 19,924 500,889
Novellus Systems, Inc. (b) 18,381 522,204
NVIDIA Corp. (b) 22,281 788,302
Teradyne, Inc. (b) 27,941 344,792
------------
8,547,787
------------
SOFTWARE (4.4%)
Autodesk, Inc. (b) 5,092 248,999
BMC Software, Inc. (b) 26,605 900,313
CA, Inc. (a) 8,932 236,251
Compuware Corp. (b) 17,407 174,070
V Microsoft Corp. 237,078 8,726,841
Novell, Inc. (b) 51,853 392,009
Sybase, Inc. (b) 2,270 64,922
Symantec Corp. (b) 114,725 2,154,536
Synopsys, Inc. (b) 15,172 428,761
------------
13,326,702
------------
SPECIALTY RETAIL (2.6%)
American Eagle Outfitters, Inc. 13,377 318,105
AutoZone, Inc. (a)(b) 6,899 858,305
Barnes & Noble, Inc. 348 13,447
Best Buy Co., Inc. (a) 28,804 1,397,570
Gap, Inc. (The) 54,892 1,037,459
Home Depot, Inc. (The) (a) 44,936 1,415,933
RadioShack Corp. (a) 20,185 416,215
</Table>
14 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -----------------------------------------------------------------------------
SPECIALTY RETAIL (CONTINUED)
Sherwin-Williams Co. (The) (a) 16,324 $ 1,043,430
TJX Cos., Inc. 50,657 1,465,507
------------
7,965,971
------------
TEXTILES, APPAREL & LUXURY GOODS (0.2%)
NIKE, Inc. Class B 1,294 85,740
Polo Ralph Lauren Corp. 9,036 621,677
------------
707,417
------------
THRIFTS & MORTGAGE FINANCE (0.0%)++
PMI Group, Inc. (The) 1,518 24,334
------------
TOBACCO (0.6%)
Altria Group, Inc. 25,023 1,824,927
------------
TRADING COMPANIES & DISTRIBUTORS (0.0%)++
United Rentals, Inc. (b) 538 18,394
------------
WIRELESS TELECOMMUNICATION SERVICES (1.2%)
ALLTEL Corp. 7,772 552,978
Sprint Nextel Corp. 135,187 2,311,698
Telephone and Data Systems, Inc. (a) 12,462 869,848
------------
3,734,524
------------
Total Common Stocks
(Cost $267,675,933) 293,549,586
------------
INVESTMENT COMPANY (2.2%)
- -----------------------------------------------------------------------------
V S&P 500 Index--SPDR Trust Series 1 (a)(c) 42,864 6,628,918
------------
Total Investment Company
(Cost $6,563,932) 6,628,918
------------
</Table>
<Table>
<Caption>
SHARES VALUE
SHORT-TERM INVESTMENT (5.9%)
- -----------------------------------------------------------------------------
INVESTMENT COMPANY (5.9%)
State Street Navigator Securities Lending Prime
Portfolio (d) 17,733,893 $ 17,733,893
------------
Total Investment Company
(Cost $17,733,893) 17,733,893
------------
Total Short-Term Investment
(Cost $17,733,893) 17,733,893
------------
Total Investments
(Cost $291,973,758) 105.7% 317,912,397(e)
Liabilities in Excess of
Cash and Other Assets (5.7) (17,042,818)
---------- ------------
Net Assets 100.0% $300,869,579
========== ============
</Table>
<Table>
++ Less than one-tenth of a percent.
(a) Represents a security, or a portion thereof, which is out on loan. The
aggregate market value of such securities is $17,202,879; cash collateral
of $17,733,893 (included in liabilities) was received with which the Fund
purchased highly liquid short-term investments.
(b) Non-income producing security.
(c) Exchange Traded Fund--represents a basket of securities that are traded on
an exchange.
(d) Represents a security, or a portion thereof, purchased with cash collateral
received for securities on loan.
(e) At October 31, 2007, cost is $293,390,128 for federal income tax purposes
and net unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 33,207,704
Gross unrealized depreciation (8,685,435)
-------------------
Net unrealized appreciation $ 24,522,269
===================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 15
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2007
<Table>
ASSETS:
Investment in securities, at value (identified
cost $291,973,758) including $17,202,879
market value of securities loaned $317,912,397
Cash 698,236
Receivables:
Dividends and interest 270,990
Fund shares sold 214,025
Other assets 15,651
-------------
Total assets 319,111,299
-------------
LIABILITIES:
Securities lending collateral 17,733,893
Payables:
Manager (See Note 3) 126,985
Investment securities purchased 117,088
Transfer agent (See Note 3) 74,734
Fund shares redeemed 61,155
Shareholder communication 49,284
NYLIFE Distributors (See Note 3) 43,199
Professional fees 17,333
Custodian 11,384
Trustees 3,111
Accrued expenses 3,554
-------------
Total liabilities 18,241,720
-------------
Net assets $300,869,579
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized $ 187,685
Additional paid-in capital 252,650,434
-------------
252,838,119
Accumulated undistributed net investment
income 1,808,457
Accumulated net realized gain on investments 20,284,364
Net unrealized appreciation on investments 25,938,639
-------------
Net assets $300,869,579
=============
CLASS A
Net assets applicable to outstanding shares $ 44,873,681
=============
Shares of beneficial interest outstanding 2,786,841
=============
Net asset value per share outstanding $ 16.10
Maximum sales charge (5.50% of offering price) 0.94
-------------
Maximum offering price per share outstanding $ 17.04
=============
CLASS B
Net assets applicable to outstanding shares $ 33,202,780
=============
Shares of beneficial interest outstanding 2,202,556
=============
Net asset value and offering price per share
outstanding $ 15.07
=============
CLASS C
Net assets applicable to outstanding shares $ 3,333,565
=============
Shares of beneficial interest outstanding 221,224
=============
Net asset value and offering price per share
outstanding $ 15.07
=============
CLASS I
Net assets applicable to outstanding shares $219,459,553
=============
Shares of beneficial interest outstanding 13,557,874
=============
Net asset value and offering price per share
outstanding $ 16.19
=============
</Table>
16 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2007
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 4,358,868
Interest 43,207
Income from securities loaned--net 26,369
------------
Total income 4,428,444
------------
EXPENSES:
Manager (See Note 3) 1,833,057
Transfer agent--Classes A, B and C (See Note
3) 338,533
Transfer agent--Class I (See Note 3) 85,245
Distribution--Class B (See Note 3) 278,156
Distribution--Class C (See Note 3) 25,841
Distribution/Service--Class A (See Note 3) 105,243
Service--Class B (See Note 3) 92,719
Service--Class C (See Note 3) 8,614
Professional fees 71,381
Shareholder communication 56,766
Custodian 54,662
Recordkeeping 52,853
Registration 51,692
Trustees 14,445
Miscellaneous 15,182
------------
Total expenses before waiver/reimbursement 3,084,389
Expense waiver/reimbursement from Manager
(See Note 3) (609,922)
------------
Net expenses 2,474,467
------------
Net investment income 1,953,977
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 21,750,830
Net change in unrealized appreciation on
investments 7,082,651
------------
Net realized and unrealized gain on investments 28,833,481
------------
Net increase in net assets resulting from
operations $30,787,458
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 17
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2007 AND OCTOBER 31, 2006
<Table>
<Caption>
2007 2006
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 1,953,977 $ 1,657,490
Net realized gain on investments 21,750,830 17,376,847
Net change in unrealized
appreciation on investments 7,082,651 11,381,328
---------------------------
Net increase in net assets
resulting from operations 30,787,458 30,415,665
---------------------------
Dividends and distributions to shareholders:
From net investment income:
Class A (153,634) (58,341)
Class I (1,431,004) (642,012)
---------------------------
(1,584,638) (700,353)
---------------------------
From net realized gain on investments:
Class A (733,266) --
Class B (779,636) --
Class C (66,841) --
Class I (2,634,965) --
---------------------------
(4,214,708) --
---------------------------
Total dividends and distributions
to shareholders (5,799,346) (700,353)
---------------------------
Capital share transactions:
Net proceeds from sale of shares 86,557,097 100,117,643
Net asset value of shares issued
to shareholders in reinvestment
of dividends and distributions 5,730,271 680,160
Cost of shares redeemed (31,441,335) (74,402,057)
Net asset value of shares
converted
(See Note 1):
Class A 5,898,019 11,276,172
Class B (5,898,019) (11,276,172)
---------------------------
Increase in net assets derived
from capital share transactions 60,846,033 26,395,746
---------------------------
Net increase in net assets 85,834,145 56,111,058
NET ASSETS:
Beginning of year 215,035,434 158,924,376
---------------------------
End of year $300,869,579 $215,035,434
===========================
Accumulated undistributed net
investment income at end of year $ 1,808,457 $ 1,452,018
===========================
</Table>
18 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
www.mainstayfunds.com 19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
---------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of period $ 14.66 $ 12.62 $ 11.41 $ 10.69 $ 9.02 $ 12.12
------- ------- ------- ------- ----------- ------------
Net investment income (loss) (a) 0.06 0.09 0.08 (b) (0.01) (0.01) (0.02)
Net realized and unrealized gain (loss) on
investments 1.72 1.97 1.13 0.73 1.68 (3.08)
------- ------- ------- ------- ----------- ------------
Total from investment operations 1.78 2.06 1.21 0.72 1.67 (3.10)
------- ------- ------- ------- ----------- ------------
Less dividends and distributions:
From net investment income (0.06) (0.02) -- -- -- --
From net realized gain on investments (0.28) -- -- -- -- --
------- ------- ------- ------- ----------- ------------
Total dividends and distributions (0.34) (0.02) -- -- -- --
------- ------- ------- ------- ----------- ------------
Net asset value at end of period $ 16.10 $ 14.66 $ 12.62 $ 11.41 $ 10.69 $ 9.02
======= ======= ======= ======= =========== ============
Total investment return (c) 12.24% 16.43% 10.60% 6.74% 18.51%(d) (25.58%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.42% 0.63% 0.67%(b) (0.05%) (0.06%)+ (0.24%)
Net expenses 1.29% 1.30% 1.38% 1.65% 1.65%+ 1.65%
Expenses (before waiver/reimbursement) 1.48% 1.60% 1.72% 1.77% 1.86%+ 1.75%
Portfolio turnover rate 122% 144% 105% 136% 71% 130%
Net assets at end of period (in 000's) $44,874 $38,940 $35,886 $34,957 $38,313 $28,639
</Table>
<Table>
<Caption>
CLASS C
-----------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of period $13.79 $11.94 $10.87 $10.25 $ 8.71 $11.79
------ ------ ------ ------ ----------- ------------
Net investment income (loss) (a) (0.05) (0.01) (0.01)(b) (0.09) (0.06) (0.10)
Net realized and unrealized gain (loss) on
investments 1.61 1.86 1.08 0.71 1.60 (2.98)
------ ------ ------ ------ ----------- ------------
Total from investment operations 1.56 1.85 1.07 0.62 1.54 (3.08)
------ ------ ------ ------ ----------- ------------
Less dividends and distributions:
From net investment income -- -- -- -- -- --
From net realized gain on investments (0.28) -- -- -- -- --
------ ------ ------ ------ ----------- ------------
Total dividends and distributions (0.28) -- -- -- -- --
------ ------ ------ ------ ----------- ------------
Net asset value at end of period $15.07 $13.79 $11.94 $10.87 $10.25 $ 8.71
====== ====== ====== ====== =========== ============
Total investment return (c) 11.47% 15.49% 9.84% 6.05% 17.68%(d) (26.12%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) (0.32%) (0.09%) (0.08%)(b) (0.80%) (0.81%)+ (0.99%)
Net expenses 2.04% 2.05% 2.13% 2.40% 2.40%+ 2.40%
Expenses (before waiver/reimbursement) 2.23% 2.35% 2.47% 2.52% 2.61%+ 2.50%
Portfolio turnover rate 122% 144% 105% 136% 71% 130%
Net assets at end of period (in 000's) $3,334 $3,254 $3,045 $2,926 $2,429 $1,724
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Net investment income and the ratio of net investment income includes $0.03 per share and
0.24%, for Class A, Class B and Class C, respectively as a result of a special one time
dividend from Microsoft Corp.
(c) Total return is calculated exclusive of sales charges. Class I is not subject to sales
charges.
(d) Total return is not annualized.
</Table>
20 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
- ---------------------------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
$ 13.80 $ 11.94 $ 10.87 $ 10.26 $ 8.71 $ 11.79
------- ------- ------- ------- ----------- ------------
(0.04) (0.01) (0.01)(b) (0.09) (0.06) (0.10)
1.59 1.87 1.08 0.70 1.61 (2.98)
------- ------- ------- ------- ----------- ------------
1.55 1.86 1.07 0.61 1.55 (3.08)
------- ------- ------- ------- ----------- ------------
-- -- -- -- -- --
(0.28) -- -- -- -- --
------- ------- ------- ------- ----------- ------------
(0.28) -- -- -- -- --
------- ------- ------- ------- ----------- ------------
$ 15.07 $ 13.80 $ 11.94 $ 10.87 $ 10.26 $ 8.71
======= ======= ======= ======= =========== ============
11.39% 15.58% 9.84% 5.95% 17.80%(d) (26.12%)
(0.31%) (0.05%) (0.08%)(b) (0.80%) (0.81%)+ (0.99%)
2.04% 2.05% 2.13% 2.40% 2.40%+ 2.40%
2.23% 2.35% 2.47% 2.52% 2.61%+ 2.50%
122% 144% 105% 136% 71% 130%
$33,203 $39,024 $50,815 $53,640 $53,946 $48,434
</Table>
<Table>
<Caption>
CLASS I
------------------------------------------------
DECEMBER 28,
2004**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
2007 2006 2005
$ 14.73 $ 12.68 $ 12.25
-------- -------- ------------
0.16 0.17 0.10
1.73 1.99 0.33
-------- -------- ------------
1.89 2.16 0.43
-------- -------- ------------
(0.15) (0.11) --
(0.28) -- --
-------- -------- ------------
(0.43) (0.11) --
-------- -------- ------------
$ 16.19 $ 14.73 $ 12.68
======== ======== ============
13.03% 17.19% 3.51%(d)
1.06% 1.24% 0.94%+
0.62% 0.66% 0.76%+
0.87% 0.96% 1.10%+
122% 144% 105%
$219,460 $133,818 $69,177
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises nineteen funds (collectively referred to as the
"Funds"). These financial statements and notes relate only to MainStay Common
Stock Fund (the "Fund"), a diversified fund.
The Fund currently offers four classes of shares. Class A shares and Class B
shares commenced on June 1, 1998. Class C shares commenced on September 1, 1998.
Class I shares commenced on December 28, 2004. Class A shares are offered at net
asset value per share plus an initial sales charge. No sales charge applies on
investments of $1 million or more (and certain other qualified purchases) in
Class A shares, but a contingent deferred sales charge is imposed on certain
redemptions of such shares within one year of the date of purchase. Class B
shares and Class C shares are offered without an initial sales charge, although
a declining contingent deferred sales charge may be imposed on redemptions made
within up to six years of purchase of Class B shares and a 1% contingent
deferred sales charge may be imposed on redemptions made within one year of
purchase of Class C shares. Class I shares are not subject to a sales charge. As
approved by the Board of Trustees in 1997, Class B shares convert to Class A
shares eight years after the date they were purchased. The four classes of
shares bear the same voting (except for issues that relate solely to one class),
dividend, liquidation and other rights and conditions except that Class B and
Class C shares are subject to higher distribution fee rates than Class A shares
under a distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I
shares are not subject to a distribution or service fee.
The Fund's investment objective is to seek long-term growth of capital, with
income as a secondary consideration.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). Securities that are not traded on the valuation date are
valued at the mean of the latest quoted bid and asked prices. Prices normally
are taken from the principal market in which each security trades. Investments
in mutual funds are valued at their net asset value as of the close of the New
York Stock Exchange on the date of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Board of Trustees to represent fair value.
Equity and non-equity securities which may be valued in this manner include, but
are not limited to: a security the trading for which has been halted or
suspended; a debt security that has recently gone into default and for which
there is not current market quotation; a security of an issuer that has entered
into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; a security where the trading on that security's principal market
is temporarily closed at a time when, under normal conditions, it would be open.
At October 31, 2007 the Fund did not hold securities that were valued in such a
manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
of net investment income and distributions of net realized capital and currency
gains, if any, annually. All dividends and distributions are reinvested in
shares of the Fund, at net asset value, unless the shareholder elects otherwise.
Dividends and distributions to shareholders are determined in accordance with
federal income tax regulations and may differ from generally accepted accounting
principles in the United States of America. Permanent book/tax differences
relating to income and gains are reclassified amongst undistributed net
investment income, accumulated net realized gain or loss and paid-in-capital.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security transac-
22 MainStay Common Stock Fund
tions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B) on
page 24) are allocated to separate classes of shares pro rata based upon their
relative net assets value on the date the expenses are incurred. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) SECURITIES LENDING. In order to realize additional income the Fund may lend
its securities to broker-dealers and financial institutions. The loans are
collateralized by cash or securities at least equal at all times to the market
value of the securities loaned. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. The Fund may bear
the risk of delay in recovery of, or loss of rights in, the securities loaned
should the borrower of the securities experience financial difficulty. The Fund
receives compensation for lending its securities in the form of fees or it
retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(H) INDEMNIFICATIONS. In the normal course of business, the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote.
However, there can be no assurance that material liabilities related to such
obligations will not arise in the future which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER. New York Life Investment Management LLC ("NYLIM" or "Manager") a
registered investment adviser and an indirect wholly-owned subsidiary of New
York Life Insurance Company ("New York Life"), serves as the Fund's Manager.
NYLIM provides offices and conducts clerical, recordkeeping and bookkeeping
services, and is responsible for the financial and accounting records required
to be maintained by the Fund. NYLIM also pays the salaries and expenses of all
personnel affiliated with the Fund and all the operational expenses that are not
the responsibility of the Fund. The Fund is advised by the Manager directly,
without a Subadvisor.
The Fund is contractually obligated to pay NYLIM a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.70% on assets up to $500 million and 0.65% on assets in
excess of $500 million, which is not recoupable. NYLIM has also contractually
agreed to waive a portion of its management fee so that the management fee is
0.60% on assets up to $500 million and 0.55% on assets in excess of $500
million, which is not recoupable. This fee may not be recouped by NYLIM.
Effective March 1, 2007, NYLIM has entered into a written expense limitation
agreement under which it has agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses (total annual operating expenses
excluding taxes, interest, litigation, extraordinary expenses, and brokerage and
other transaction expenses relating to the purchase or sale of portfolio
investments) do not exceed the following amounts of average daily net assets for
each class: Class A, 1.30%; Class B, 2.05%; Class C, 2.05%; and Class I, 0.62%.
This expense limitation may be modified or terminated only with the approval of
the Board of Trustees. NYLIM may recoup the amount of any management fee waivers
or expense reimbursements from the Fund pursuant to the agreement if such action
does not cause the Fund to exceed existing expense limitations and the
recoupment is made within three years after the year in which NYLIM incurred the
expense.
For the year ended October 31, 2007, NYLIM earned fees from the Fund in the
amount of $1,833,057 and waived/reimbursed its fees in the amount of $609,922 of
which $348,057 is recoupable.
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As of October 31, 2007, the amounts of waived fees that are subject to possible
recoupment by NYLIM, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 2010 TOTAL
$124,534 $550,657 $348,057 $1,023,248
----------------------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Prior to March 1, 2007, NYLIM had an agreement in place under which it had
agreed to waive a portion of the Fund's management fee or reimburse the expenses
of the Fund so that the Fund's total ordinary operating expenses did not exceed
1.30% of the Fund's average daily net assets for its Class A shares. NYLIM also
applied an equivalent waiver or reimbursement, in an equal amount of basis
points, to the other share classes of the Fund.
State Street Bank & Trust Company ("SSBT"), One Lincoln Street, Boston,
Massachusetts, 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with NYLIM. These services include calculating
daily net asset values of the Fund, maintaining general ledger and sub-ledger
accounts for the calculation of the Fund's respective net asset values, and
assisting NYLIM in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, SSBT is compensated by
NYLIM.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, other than Class I shares, has adopted distribution plans
(the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940
Act.
Pursuant to the Class A Plan, the Distributor receives a monthly distribution
fee from the Fund at an annual rate of 0.25% of the average daily net assets of
the Fund's Class A shares, which is an expense of the Class A shares of the Fund
for distribution or service activities as designated by the Distributor.
Pursuant to the Class B and Class C Plans, the Fund pays the Distributor a
monthly distribution fee, which is an expense of the Class B and Class C shares
of the Fund, at the annual rate of 0.75% of the average daily net assets of the
Fund's Class B and Class C shares. The Plans provide that the Class B and Class
C shares of the Fund also incur a service fee at the annual rate of 0.25% of the
average daily net asset value of the Class B and Class C shares of the Fund.
Class I shares are not subject to a distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $13,792 for the year ended
October 31, 2007. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $862, $42,036 and $1,198, respectively, for the year ended October 31,
2007.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund, for the year ended October 31, 2007,
amounted to $423,778.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts, effective March 1, 2007. Shareholders with an account
balance of less than $1,000 are charged an annual per account fee of $20
(assessed semi-annually).
(F) CAPITAL. At October 31, 2007, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $ 321 0.0*%
- -------------------------------------------------------------
Class C 162 0.0*
- -------------------------------------------------------------
Class I 2,742 0.0*
- -------------------------------------------------------------
</Table>
* Less than one-tenth of a percent.
(G) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2007, these fees, which are included in professional fees
shown on the Statement of Operations, were $9,999.
The Fund pays the Manager a monthly fee for certain pricing and recordkeeping
services provided under the Accounting Agreement at the annual rate of 1/20 of
1% for the first $20 million of average monthly net assets, 1/30 of 1% of the
next $80 million of average monthly net assets and 1/100 of 1% of any amount in
excess of $100 million of average monthly net assets. Fees for these services
provided to the Fund by the Manager amounted to $52,853 for the year ended
October 31, 2007.
24 MainStay Common Stock Fund
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2007, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL TEMPORARY APPRECIATION ACCUMULATED
INCOME GAINS (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$11,177,565 $12,331,626 $ -- $24,522,269 $48,031,460
-----------------------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated net realized
gain on investments, arising from permanent differences; net assets at October
31, 2007 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$ (12,900) $12,900 $ --
--------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to real estate investment
trust distributions.
The tax character of distributions paid during the years ended October 31, 2007
and October 31, 2006, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2007 2006
Distributions paid from:
Ordinary Income $1,584,638 $700,353
Long-Term Capital Gains 4,214,708 --
- -----------------------------------------------------------
$5,799,346 $700,353
=======================
</Table>
NOTE 5--CUSTODIAN:
SSBT is the custodian of cash and securities of the Fund. Custodial fees are
charged to the Fund based on the market value of securities in the Fund and the
number of certain cash transactions incurred by the Fund.
NOTE 6--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. These funds pay a commitment fee, at an annual rate of .060% of the
average commitment amount, regardless of usage, to The Bank of New York, which
acts as agent to the syndicate. Such commitment fees are allocated among the
funds based upon net assets and other factors. Interest on any revolving credit
loan is charged based upon the Federal Funds Advances rate. There were no
borrowings made or outstanding on the line of credit during the year ended
October 31, 2007.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2007, purchases and sales of securities, other
than short-term securities, were $372,817 and $317,186, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 432 $ 6,607
Shares issued to shareholders in
reinvestment of dividends and
distributions 58 861
Shares redeemed (740) (11,368)
-----------------
Net decrease in shares outstanding
before conversion (250) (3,900)
Shares converted from Class B (See
Note 1) 382 5,898
-----------------
Net increase 132 $ 1,998
=================
Year ended October 31, 2006:
Shares sold 478 $ 6,512
Shares issued to shareholders in
reinvestment of dividends 3 38
Shares redeemed (1,525) (20,988)
-----------------
Net decrease in shares outstanding
before conversion (1,044) (14,438)
Shares converted from Class B (See
Note 1) 856 11,276
-----------------
Net decrease (188) $ (3,162)
=================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 285 $ 4,053
Shares issued to shareholders in
reinvestment of distributions 54 750
Shares redeemed (558) (7,998)
-----------------
Net decrease in shares outstanding
before conversion (219) (3,195)
Shares reacquired upon conversion into
Class A (See Note 1) (407) (5,898)
-----------------
Net decrease (626) $ (9,093)
=================
Year ended October 31, 2006:
Shares sold 309 $ 3,989
Shares redeemed (832) (10,654)
-----------------
Net decrease in shares outstanding
before conversion (523) (6,665)
Shares reacquired upon conversion into
Class A (See Note 1) (905) (11,276)
-----------------
Net decrease (1,428) $(17,941)
=================
</Table>
www.mainstayfunds.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 51 $ 735
Shares issued to shareholders in
reinvestment of distributions 4 52
Shares redeemed (70) (1,006)
----------------
Net decrease (15) $ (219)
================
Year ended October 31, 2006:
Shares sold 51 $ 665
Shares redeemed (70) (886)
----------------
Net decrease (19) $ (221)
================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 4,918 $75,162
Shares issued to shareholders in
reinvestment of dividends and
distributions 275 4,067
Shares redeemed (717) (11,069)
----------------
Net increase 4,476 $68,160
================
Year ended October 31, 2006:
Shares sold 6,535 $88,951
Shares issued to shareholders in
reinvestment of dividends 49 642
Shares redeemed (2,957) (41,875)
----------------
Net increase 3,627 $47,718
================
</Table>
NOTE 9--OTHER MATTERS:
In 2004 the Securities and Exchange Commission ("SEC") raised concerns relating
to a guarantee provided to shareholders of the MainStay Equity Index Fund and
the fees and expenses of that Fund, as well as the related guaranteed disclosure
that fund's shareholders. Discussions have been held with the SEC concerning a
possible resolution of this matter. There can be no assurance at this time as to
the outcome of these efforts.
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS:
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes", an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation becomes effective for the Fund's 2008 fiscal
year, and is to be applied to all open tax years as of the date of
effectiveness. Based on Management's analysis, the determination has been made
that the adoption of the interpretation on November 1, 2007, did not have an
impact on the Fund's financial statements upon adoption. Management continually
reviews the Fund's tax positions and such conclusions under the Interpretation
based on factors, including, but not limited to, ongoing analyses of tax laws,
regulations and interpretations, thereof.
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The changes to current generally accepted accounting
principles from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures
about fair value measurements. As of October 31, 2007, the Fund does not believe
the adoption of SFAS No. 157 will impact the amounts reported in the Fund's
financial statements. However, additional disclosures may be required about the
inputs used to develop the measurements and the effect of certain measurements
reported in the financial statements for a fiscal period.
NOTE 11--SUBSEQUENT EVENT:
At a meeting held on June 6, 2007, the Board of Trustees approved a plan of
reorganization where the Fund would acquire the assets, including the
investments, and assume the identified liabilities of McMorgan Equity Investment
Fund, a series of the McMorgan Trust.
Shareholders of McMorgan Equity Investment Fund approved this reorganization on
November 20, 2007. The reorganization was completed on November 27, 2007. The
aggregate net assets of the Fund immediately before the acquisition were
$286,164,279 and the combined net assets after the acquisition was $485,490,761.
The acquisition was accomplished by a tax-free exchange of the following:
<Table>
<Caption>
SHARES VALUE
McMorgan Equity Investment Fund
Class McMorgan 7,437,716 $186,185,373
Class Z 525,373 13,141,109
- ---------------------------------------------------------
</Table>
In exchange for the McMorgan Equity Investment Fund shares and net assets, the
Fund issued 14,658,946 of Class I shares.
26 MainStay Common Stock Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Common Stock Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2007, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years or periods in the four-year
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the periods presented through October 31,
2003, were audited by other auditors, whose report dated December 18, 2003,
expressed an unqualified opinion thereon.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2007, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Common Stock Fund of The MainStay Funds as of October 31, 2007, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years or periods in the four-year period then ended,
in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 20, 2007
www.mainstayfunds.com 27
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS.
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with New York Life Investment Management LLC (the "Manager") (the
"Agreement") at a meeting held on May 22 and 23, 2007. In connection with the
approval of the Agreement, the Trustees reviewed a significant amount of a wide
variety of information that they had requested and received from the Manager,
and data and analysis from an outside data provider and a third party
consultant. The Trustees considered various industry trends and regulatory
developments in their deliberations. In considering approval of the Agreement,
and in evaluating the fairness of the compensation to be paid by the Fund, the
Trustees met both as a full Board and in executive session with no Interested
Trustee present, in advance of the meeting at which the Agreement was approved,
and they considered a number of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager. The Trustees reviewed the services that the Manager has
provided historically to the Fund, and also generally to other series of the
Trust. Among other services, the Manager's services have included investment
management services--which include, but are not limited to, monitoring and
evaluating the Fund's investment program and investment results, providing the
day-to-day portfolio management of the Fund, determining the composition of
assets of the Fund and the timing of the Fund's execution of the purchase and
sale of assets, and the Fund's compliance with its investment policies and
restrictions--and administrative services, including working with other service
providers of the Trust, maintaining certain Fund records, providing office
space, performing clerical and bookkeeping services for the Fund, preparing
Board materials and Fund filings, and otherwise managing the Trust's operations.
The Trustees considered, among other things, the Manager's management,
personnel, resources, operations and portfolio management capabilities. The
Board reviewed reports on the Manager's brokerage practices, including with
respect to best execution of portfolio trades. The Trustees considered the
Manager's supervision of the Fund's service providers and its attention to the
compliance program of the Trust, the Manager, and certain other service
providers. The Trustees noted the generally favorable results of a third party
review of the services and communications that NYLIM Service Company LLC, an
affiliate of the Manager, has provided to Trust shareholders.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, investment performance that was
better than the peer median over the several time periods considered, and
measures that the Manager had previously taken in seeking to improve the Fund's
performance by increasing the Fund's tracking error with respect to its
benchmark.
The Trustees considered the cost to the Manager of the Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods.
In reviewing profitability information, the Trustees reviewed, among other
things, information about the allocation of expenses among the Manager and its
affiliates. The Trustees were provided information that indicated that the
profitability to the Manager and its affiliates from the Management Agreement
with respect to the Fund was moderate, and from the overall relationship with
the Trust was low. The Trustees considered other benefits that the Manager and
its affiliates receive from the relationship with the Trust, including benefits
that NYLIFE Distributors and MainStay Shareholder Services receive in exchange
for services they provide to the Funds, and certain benefits from soft dollar
arrangements. The Trustees acknowledged certain benefits to the reputation of
the Manager and the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They considered that, across the Trust
(though not every series or share class), gross transfer agency fees tended to
be relatively high and, therefore, adversely affected gross expense ratios.
Noting that the Trust historically permitted smaller investor accounts, the
Trustees considered measures that had been recently implemented that were
intended to increase the average size of shareholder accounts, including
generally higher investment minimums, and small account fees, and the Trustees
considered potential benefits to the Manager and its affiliates arising from
such measures.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the Manager's willingness to implement a
contractual breakpoint that would reduce the Fund's management fee at levels
above the breakpoint, and the fact that the
28 MainStay Common Stock Fund
breakpoint was intended to provide that shareholders would share in benefits
from economies of scale obtained through the growth in the Fund's assets. The
Trustees noted that the Fund not reached the asset level at which the breakpoint
would reduce the Fund's management fee rate. The Trustees reviewed information
about the potential effect of asset growth on Fund expenses, the difficulty of
forecasting its effect on the profitability of the Manager and its affiliates,
and the management fee breakpoints applicable to the Fund and certain other
funds.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by the
Fund, the Trustees evaluated factors such as the fees and expenses borne by
other registered funds in the market pursuing strategies generally similar to
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager, including registered and other funds as well as
separate institutional accounts having investment strategies similar to that of
the Fund, and took account of explanations and other information relating to the
fees and expenses of those other funds and accounts. The Trustees considered the
current and proposed contractual and net management fees, its anticipated
expense ratio, and various components of the expense ratio, in comparison to
other funds in comparison groupings. The Trustees generally acknowledged the
historical relationship between the Manager and the Trust and the likely
difficulties in implementing an alternative to the investment management
arrangement between the Trust and the Manager. The Trustees took account of the
Manager's willingness to maintain the management fee waiver and expense
limitation applicable to the Fund.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings, with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreement. This summary set out
above describes the most important, but not all, of the factors considered by
the Trustees in considering the Agreement. On the basis of their review, a
majority of the Trustees and a majority of the Non-Interested Trustees concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of the Agreement, and it was the judgment of a
majority of the Trustees and a majority of the Non-Interested Trustees that
approval of the Agreement was in the best interests of the Fund and its
shareholders.
www.mainstayfunds.com 29
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advise shareholders within
60 days of the Fund's fiscal year end (October 31, 2007) as to the federal tax
status of dividends paid by the Fund during such fiscal year. Accordingly, the
Fund paid long-term capital gain distributions of $4,214,708.
The dividends paid by the Fund during the fiscal year ended October 31, 2007,
should be multiplied by 34.7% to arrive at the amount eligible for qualified
dividend income and 37.0% for the corporate dividends received deduction.
In January 2008, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2007. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2007.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
or (iii) on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 1-800-MAINSTAY (1-800-624-6782). You also can obtain and review copies
of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC
(information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330).
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of The MainStay Funds (the
"Trust") was held on May 4, 2007, at the offices of New York Life Investment
Management LLC in Parsippany, New Jersey. The purpose of the meeting was to
elect the following individuals to the Board of Trustees of the Trust:
- Susan B. Kerley
- Alan R. Latshaw
- Peter Meenan
- Richard H. Nolan, Jr.
- Richard S. Trutanic
- Roman L. Weil
- John A. Weisser
- Brian A. Murdock (Interested Trustee)
There are no other Trustees of the Trust.
No other business came before the special meeting. The proposal to elect
Trustees was passed by the shareholders of the Fund as shown below:
<Table>
<Caption>
COMMON
STOCK VOTES VOTES
FUND FOR WITHHELD ABSTENTIONS TOTAL
Susan B. Kerley 8,925,297.533 11,611.276 158.000 8,937,066.809
- -------------------------------------------------------------------------
Alan R. Latshaw 8,924,249.462 12,659.347 158.000 8,937,066.809
- -------------------------------------------------------------------------
Peter Meenan 8,925,297.533 11,611.276 158.000 8,937,066.809
- -------------------------------------------------------------------------
Richard H.
Nolan, Jr. 8,924,209.559 12,699.250 158.000 8,937,066.809
- -------------------------------------------------------------------------
Richard S.
Trutanic 8,925,257.630 11,651.179 158.000 8,937,066.809
- -------------------------------------------------------------------------
Roman L. Weil 8,924,209.559 12,699.250 158.000 8,937,066.809
- -------------------------------------------------------------------------
John A. Weisser 8,925,103.317 11,805.492 158.000 8,937,066.809
- -------------------------------------------------------------------------
Brian A. Murdock 8,924,249.462 12,659.347 158.000 8,937,066.809
- -------------------------------------------------------------------------
</Table>
This resulted in approval of the proposal.
30 MainStay Common Stock Fund
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Pursuant to
notice, a Special Meeting of Shareholders of the Trust was held on May 4, 2007,
at NYLIM's offices in Parsippany, New Jersey. The Trustees listed below were
elected to serve the Trust effective June 7, 2007.
Each Trustee serves until his or her successor is elected and qualified or until
his or her resignation, death or removal. The Retirement Policy provides that a
Trustee shall tender his or her resignation upon reaching age 72. A Trustee
reaching the age of 72 may continue for additional one-year periods with the
approval of the Board's Nominating and Governance Committee, except that no
Trustee shall serve on the Board past his or her 75th birthday. Officers serve a
term of one year and are elected annually by the Trustees. The business address
of each Trustee and officer listed below is 51 Madison Avenue, New York, New
York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF FUNDS
POSITION(S) HELD IN FUND COMPLEX
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
BRIAN A. MURDOCK Indefinite; Member of the Board of Managers 73 Trustee, Eclipse Funds since
3/14/56 Trustee and Chief and President (since 2004) and June, 2007 (3 funds); Director,
Executive Officer Chief Executive Officer (since Eclipse Funds Inc. since June
since 2006 2006), New York Life Investment 2007 (22 funds); Director,
Management LLC and New York MainStay VP Series Fund, Inc.,
Life Investment Management since 2006 (24 portfolios);
Holdings LLC; Senior Vice Director, ICAP Funds, Inc.,
President, New York Life since 2006 (3 funds)
Insurance Company (since 2004);
Chairman of the Board and
President, NYLIFE Distributors
LLC (since 2004); Member of the
Board of Managers, NYLCAP
Manager LLC and Madison Capital
Funding LLC (since 2004),
MacKay Shields LLC and
Institutional Capital LLC
(since 2006), and McMorgan &
Company LLC (since 2007); Chief
Executive Officer, Eclipse
Funds and Eclipse Funds Inc.
(since 2006); Chairman (2006 to
2007) and Director and Chief
Executive Officer (since 2006),
MainStay VP Series Fund, Inc.;
Director and Chief Executive
Officer, ICAP Funds, Inc.
(since 2006); Chief Investment
Officer, MLIM Europe and Asia
(2001 to 2003); President of
Merrill Japan and Chairman of
MLIM's Pacific Region (1999 to
2001)
-----------------------------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow Capital
Management, Inc., McMorgan & Company LLC, NYLIFE Securities Inc. and/or NYLIFE
Distributors LLC, as described in detail above in the column "Principal
Occupation(s) During Past Five Years."
www.mainstayfunds.com 31
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. KERLEY Indefinite; Partner, Strategic Management 73 Chairman since 2005 and Trustee
8/12/51 Chairman and Advisors LLC (since 1990) since 2000, Eclipse Funds (3
Trustee since funds); Chairman since 2005 and
June 2007 Director since 1990, Eclipse
Funds Inc. (22 funds); Chairman
and Director, ICAP Funds, Inc.,
since 2006 (3 funds); Chairman
and Director, MainStay VP
Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
Legg Mason Partners Funds,
Inc., since 1991 (30
portfolios)
----------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & Young 73 Trustee, Eclipse Funds since
3/27/51 Trustee and Audit LLP (2002 to 2003); Partner, June 2007 (3 funds); Director,
Committee Arthur Andersen LLP (1989 to Eclipse Funds Inc. since June
Financial Expert 2002); Consultant to the Audit 2007 (22 funds); Director, ICAP
since 2006 and Compliance Committee of The Funds, Inc., since June 2007 (3
MainStay Funds (2004 funds); Director, MainStay VP
to 2006) Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
State Farm Associates Funds
Trusts since 2005 (3
portfolios); Trustee, State
Farm Mutual Fund Trust since
2005 (15 portfolios); Trustee,
State Farm Variable Product
Trust since 2005 (9 portfolios)
----------------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds since
12/5/41 Trustee since President and Chief Executive 2002 (3 funds); Director,
June 2007 Officer, Babson-United, Inc. Eclipse Funds Inc. since 2002
(financial services firm) (2000 (22 funds); Director, ICAP
to 2004); Independent Funds, Inc.,
Consultant (1999 to 2000); Head since 2006 (3 funds); Director,
of Global Funds, Citicorp (1995 MainStay VP Series Fund, Inc.,
to 1999) since June 2007 (24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 73 Trustee, Eclipse Funds since
NOLAN, JR. Trustee since Management; President--Shields/ June 2007 (3 funds); Director,
11/16/46 June 2007 Alliance, Alliance Capital Eclipse Funds Inc. since June
Management (1994 to 2004) 2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 2006
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman (since 1990) and Chief 73 Trustee, Eclipse Funds since
TRUTANIC Trustee since Executive Officer (1990 to June 2007 (3 funds); Director,
2/13/52 1994 1999), Somerset Group Eclipse Funds Inc. since June
(financial advisory firm); 2007 (22 funds); Director, ICAP
Managing Director and Advisor, Funds, Inc., since June 2007 (3
The Carlyle Group (private funds); Director, MainStay VP
investment firm) (2002 to Series Fund, Inc., since June
2004); Senior Managing Director 2007 (24 portfolios)
and Partner, Groupe Arnault
S.A. (private investment firm)
(1999 to 2002)
----------------------------------------------------------------------------------------------------------------------
</Table>
32 MainStay Common Stock Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEE
ROMAN L. WEIL Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds since
5/22/40 Trustee and Audit Accounting, Graduate School of June 2007 (3 funds); Director,
Committee Business, University of Eclipse Funds Inc. since June
Financial Expert Chicago; President, Roman L. 2007 (22 funds); Director, ICAP
since June 2007 Weil Associates, Inc. Funds, Inc., since June 2007 (3
(consulting firm) funds); Director, MainStay VP
Series Fund, Inc., since 1994
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 73 Trustee, Eclipse Funds since
10/22/41 Trustee since Salomon Brothers, Inc. (1971 to June 2007 (3 funds); Director,
June 2007 1995) Eclipse Funds Inc. since June
2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 1997
(24 portfolios); Trustee,
Direxion Funds (69 funds) and
Direxion Insurance Trust (45
funds) since March 2007
----------------------------------------------------------------------------------------------------------------------
</Table>
Terry L. Lierman resigned as Trustee of the Trust effective May 31, 2007. Edward
J. Hogan, John B. McGuckian and Donald E. Nickelson resigned as Trustees of the
Trust effective June 7, 2007.
At a meeting of the Board of Trustees held on June 7 and 8, 2007, the following
individuals were appointed to serve as Officers of the Trust effective June 7,
2007:
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ROBERT A. Chief Legal Senior Managing Director, General Counsel and Secretary, New
ANSELMI Officer since York Life Investment Management LLC (including predecessor
10/19/46 2004 advisory organizations) (since 2000); Secretary (since 2001)
and General Counsel (since 2004), New York Life Investment
Management Holdings LLC; Senior Vice President, New York
Life Insurance Company (since 2000); Vice President and
Secretary, McMorgan & Company LLC (since 2001); Secretary,
NYLIM Service Company LLC (since 2005), NYLCAP Manager LLC
(since 2004), Madison Capital Funding LLC (since 2002), and
Institutional Capital LLC (since 2006); Chief Legal Officer,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), McMorgan Funds (since 2005) and
ICAP Funds, Inc. (since 2006); Managing Director and Senior
Counsel, Lehman Brothers Inc. (1998 to 1999); General
Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998)
-------------------------------------------------------------------------------------------------
JACK R. Treasurer and Managing Director, New York Life Investment Management LLC
BENINTENDE Principal (since June 2007); Treasurer and Principal Financial and
5/12/64 Financial and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
Accounting MainStay VP Series Fund, Inc., and ICAP Funds, Inc. (since
Officer since June 2007); Vice President, Prudential Investments (2000 to
June 2007 2007); Assistant Treasurer, JennisonDryden Family of Funds,
Target Portfolio Trust, The Prudential Series Fund and
American Skandia Trust (2006 to 2007); Treasurer and
Principal Financial Officer, The Greater China Fund (2007)
-------------------------------------------------------------------------------------------------
STEPHEN P. President since Senior Managing Director and Chief Marketing Officer, New
FISHER March 2007 York Life Investment Management LLC (since 2005); Managing
2/22/59 Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since March 2007); Managing Director, UBS
Global Asset Management (1999 to 2003)
-------------------------------------------------------------------------------------------------
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration predecessor advisory organizations) (since 2000); Executive
2/8/59 since 2005 Vice President, New York Life Trust Company (since 2006);
Vice President--Administration, Eclipse Funds, Eclipse Funds
Inc. and MainStay VP Series Fund, Inc. (since 2005) and ICAP
Funds, Inc. (since 2006)
-------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 33
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Senior Managing Director and Chief Compliance Officer (since
MICUCCI President and 2006) and Managing Director and Chief Compliance Officer
12/16/65 Chief Compliance (2003 to 2006), New York Life Investment Management LLC and
Officer since New York Life Investment Management Holdings LLC; Senior
2006 Managing Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE Distributors
LLC; Chief Compliance Officer, NYLCAP Manager LLC (since
2006); Senior Vice President and Chief Compliance Officer,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund,
Inc., and ICAP Funds, Inc. (since 2006); Vice President--
Compliance, Eclipse Funds, Eclipse Funds Inc. and MainStay
VP Series Fund, Inc. (2004 to 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002)
-------------------------------------------------------------------------------------------------
MARGUERITE E.H. Secretary since Managing Director and Associate General Counsel, New York
MORRISON* 2004 Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC (since
2005); Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP Funds,
Inc. (since 2006); Chief Legal Officer--Mutual Funds and
Vice President and Corporate Counsel, The Prudential
Insurance Company of America (2000 to 2004)
-------------------------------------------------------------------------------------------------
</Table>
* In addition to serving as Secretary to the Trust, effective January 1, 2008,
Marguerite E.H. Morrison will assume the role of Chief Legal Officer to the
Trust.
Arphiela Arizmendi resigned as Treasurer and Principal Financial and Accounting
Officer of the Trust effective June 7, 2007.
Christopher O. Blunt resigned as President of the Trust effective March 12,
2007.
Alan J. Kirshenbaum resigned as Senior Vice President of the Trust effective
March 19, 2007.
34 MainStay Common Stock Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay 130/30 Core Fund
MainStay 130/30 Growth Fund
MainStay All Cap Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay 130/30 High Yield Fund(2)
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Institutional Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Principal Preservation Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay 130/30 International Fund
MainStay Global High Income Fund
MainStay ICAP International Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
RETIREMENT FUNDS
MainStay Retirement 2010 Fund
MainStay Retirement 2020 Fund
MainStay Retirement 2030 Fund
MainStay Retirement 2040 Fund
MainStay Retirement 2050 Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
New York, New York
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
Chicago, Illinois
MACKAY SHIELDS LLC(3)
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
MCMORGAN & COMPANY LLC(3)
San Francisco, California
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
(NEW YORK LIFE INVESTMENT MANAGEMENT LLC LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2007 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A011872 (RECYCLE LOGO) MS329-07 MSCS11-12/07
21
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
CONVERTIBLE FUND
Message from the President
and
Annual Report
October 31, 2007
MESSAGE FROM
THE PRESIDENT
The 12-month period ended October 31, 2007, was a dynamic one for mutual fund
investors. U.S. equity markets generally advanced, with growth stocks out-
performing value stocks at all capitalization levels. Although past performance
is no guarantee of future results, international stocks as a whole provided even
stronger returns for U.S. investors.
The progress of the equity markets, however, was far from steady. In February,
weakness in Asian markets led to sharp price declines around the globe. The
correction caused many investors to reconsider whether China and other emerging
economies could sustain their rapid growth. Fortunately, strong
corporate-earnings reports and positive economic news helped the stock market
regain its footing.
In July and August, difficulties in the subprime-mortgage market led to another
stock-market correction. A number of high-profile mortgage originators either
closed their doors or were sold to larger entities. Other leading financial
services firms faced major write-offs because of subprime-mortgage exposure.
The Federal Open Market Committee (FOMC) took prompt action to increase
liquidity and stabilize the financial markets by lowering the discount rate and
the federal funds target rate during the reporting period. These Federal Reserve
moves helped calm investor concerns, and the stock market generally advanced
from August 16, 2007, the date of an unscheduled FOMC meeting, through the end
of October 2007.
Difficulties in the subprime-mortgage market led to a "flight to quality," or a
general movement toward fixed-income securities that carry lower risk. As demand
for short- and intermediate-term Treasury securities increased, yields fell
across much of the maturity spectrum. Yields rose, however, on 20-and 30-year
Treasury bonds, and the yield curve steepened during the 12-month reporting
period.
High-yield bonds rallied from November 2006 through May 2007. But in June and
July, the yield differences--or spreads--between high-yield bonds and comparable
Treasury securities began to widen. At the end of October 2007, these spreads
were wider than when the reporting period began, making high-yield securities
more attractive to investors willing to accept higher risk.
To help investors address the challenges of today's ever-changing markets, New
York Life Investment Management LLC provides access to seven institutional
investment boutiques, each with its own proprietary research and investment
culture. As advisors and subadvisors to MainStay Funds, these boutiques bring a
wealth of experience and market insight to our shareholders. The portfolio
managers of each MainStay Fund seek to consistently apply time-tested investment
principles across a wide variety of market environments.
The report that follows provides more specific information about the market
forces and investment decisions that affected your investment in MainStay Funds
from November 1, 2006, through October 31, 2007. Please read the report
carefully. As you do, bear in mind that this annual report reflects just a short
segment of your lifetime investment journey. We look forward to continuing to
work with you, wherever that journey may lead.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
CONVERTIBLE FUND
MainStay Funds
Annual Report
October 31, 2007
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 15
- --------------------------------------------------------------------------------
Notes to Financial Statements 20
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 26
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 27
- --------------------------------------------------------------------------------
Federal Income Tax Information 29
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 29
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 29
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 29
- --------------------------------------------------------------------------------
Trustees and Officers 30
</Table>
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT
MONTH-END PERFORMANCE INFORMATION, PLEASE CALL 1-800-MAINSTAY (1-800-624-6782)
OR VISIT WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 13.50% 11.47% 7.72%
Excluding sales charges 20.10 12.74 8.33
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MERRILL LYNCH ALL CONVERTIBLE
MAINSTAY CONVERTIBLE FUND SECURITIES INDEX
------------------------- -----------------------------
10/31/97 9450.00 10000.00
9108.00 9922.00
11037.00 12785.00
13806.00 15120.00
12215.00 12599.00
11552.00 11348.00
13683.00 14660.00
14245.00 15851.00
15842.00 16562.00
17516.00 18737.00
10/31/07 21037.00 21120.00
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 14.25% 11.65% 7.54%
Excluding sales charges 19.25 11.91 7.54
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MERRILL LYNCH ALL CONVERTIBLE
MAINSTAY CONVERTIBLE FUND SECURITIES INDEX
------------------------- -----------------------------
10/31/07 10000.00 10000.00
9570.00 9922.00
11517.00 12785.00
14302.00 15120.00
12562.00 12599.00
11787.00 11348.00
13856.00 14660.00
14316.00 15851.00
15798.00 16562.00
17347.00 18737.00
10/31/07 20687.00 21120.00
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 18.27% 11.89% 7.53%
Excluding sales charges 19.27 11.89 7.53
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MERRILL LYNCH ALL CONVERTIBLE
MAINSTAY CONVERTIBLE FUND SECURITIES INDEX
------------------------- -----------------------------
10/31/97 10000.00 10000.00
9570.00 9922.00
11517.00 12785.00
14302.00 15120.00
12562.00 12599.00
11787.00 11348.00
13856.00 14660.00
14316.00 15851.00
15798.00 16562.00
17335.00 18737.00
10/31/07 20675.00 21120.00
</Table>
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect maximum applicable sales charges explained in this paragraph, change in
share price, and reinvestment of dividend and capital-gain distributions. The
graphs assume an initial investment of $10,000 and reflect the deduction of all
sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase and have an annual 12b-1 fee of 1.00%.
Performance figures reflect certain fee waivers and/or expense limitations,
without which total returns may have been lower. These fee waivers and/or
expense limitations are contractual and may be modified or terminated only with
the approval of the Board of Trustees. The Manager may recoup the amount of any
management fee waivers or expense reimbursements from the Fund pursuant to the
contract if such action does not cause the Fund to exceed existing expense
limitations and the recoupment is made within three years after the year in
which
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- ----------------------------------------------------------------------------------
Merrill Lynch All Convertible Securities Index(1) 12.72% 13.23% 7.76%
Average Lipper convertible securities fund(2) 15.11 13.11 7.30
</Table>
the Manager incurred the expense. Prior to 9/1/98 performance of Class C shares
includes the historical performance of Class B shares adjusted to reflect the
applicable sales charge (or CDSC), fees, estimated expenses and fee
waivers/expense limitations of Class C shares upon initial offer. Unadjusted,
the performance shown for the newer class of shares might have been lower.
1. The Merrill Lynch All Convertible Securities Index is an unmanaged weighted
index of domestic corporate convertible securities. To be included in the
Index, bonds and pre-ferred stocks must be convertible only to common stock
and have a market value or original par value of at least $50 million.
Results assume reinvestment of all income and capital gains. The Merrill
Lynch All Convertible Securities Index is considered to be the Fund's
broad-based securities-market index for comparison purposes. An investment
cannot be made directly in an index.
2. Lipper Inc. is an independent monitor of fund performance. Results are based
on total returns with all dividend and capital-gain distributions reinvested.
THE DISCLOSURE ON THE PRECEDING PAGE IS AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Convertible Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY CONVERTIBLE FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2007, to October 31, 2007,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1,
2007, to October 31, 2007.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six-months ended October 31, 2007. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/07 10/31/07 PERIOD(1) 10/31/07 PERIOD(1)
CLASS A SHARES $1,000.00 $1,123.15 $ 6.37 $1,019.05 $6.06
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,119.30 $10.36 $1,015.30 $9.85
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,119.40 $10.36 $1,015.30 $9.85
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's net annualized expense ratio of each class
(1.19% for Class A and 1.94% for Class B and Class C) multiplied by the
average account value over the period, divided by 365 and multiplied by 184
(to reflect the one-half year period).
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2007
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Convertible Bonds 71.10
Short-Term Investments (collateral from securities lending 14.30
is 8.1%)
Convertible Preferred Stocks 12.20
Common Stocks 10.00
Liabilities in Excess of Cash and Other Assets (7.60)
</Table>
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2007 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Merrill Lynch & Co., Inc. (zero coupon), due
3/13/32
2. Halliburton Co., 3.125% due 7/15/23
3. Covanta Holding Corp., 1.00%, due 2/1/27
4. Fisher Scientific International, Inc., 3.25%,
due 3/1/24
5. Transocean, Inc., 1.50%, due 5/15/21
6. Schlumberger, Ltd., 1.50%, due 6/1/23
7. Credit Suisse USA, Inc. (Hewlett-Packard Co.),
1.00%, due 3/23/11
8. Cameron International Corp., 2.50%, due 6/15/26
9. General Motors Corp., 6.25%, Series C
10. Teva Pharmaceutical Finance LLC, Series A,
0.50%, due 2/1/24
</Table>
8 MainStay Convertible Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Edward Silverstein, CFA of MacKay
Shields LLC
HOW DID MAINSTAY CONVERTIBLE FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2007?
Excluding all sales charges, MainStay Convertible Fund returned 20.10% for Class
A shares, 19.25% for Class B shares and 19.27% for Class C shares for the 12
months ended October 31, 2007. All share classes outperformed the 15.11% return
of the average Lipper(1) convertible securities fund and the 12.72% return of
the Merrill Lynch All Convertible Securities Index,(2) for the 12 months ended
October 31, 2007. The Merrill Lynch All Convertible Securities Index is the
Fund's broad-based securities-market index. See page 5 for Fund returns with
sales charges.
WHICH INDUSTRIES WERE STRONG PERFORMERS AND WHICH ONES WERE WEAK DURING THE
REPORTING PERIOD?
The best-performing industries for the Fund in absolute terms were oil services,
metals & mining and technology. Industries that detracted the most from absolute
performance included financial services, health care and retail.
WHICH INDIVIDUAL FUND HOLDINGS WERE THE STRONGEST PERFORMERS DURING THE
REPORTING PERIOD?
A convertible bond position in Cameron International was the Fund's strongest
holding during the reporting period. Cameron manufactures equipment used in oil
and gas development projects and has benefited from high energy prices. A
convertible bond position in oil & gas services company Schlumberger was the
Fund's second-best performer during the reporting period. Around the world,
nations and companies are intensively pursuing new reserves and new ways to
exploit existing ones. This trend has helped sales and earnings at both Cameron
International and Schlumberger.
Other strong performers included Vale Capital and metals & mining company
Freeport-McMoRan Copper & Gold. In the technology sector, EMC shares and
convertible bonds rose sharply, and the common stock of Microsoft enhanced Fund
performance.
WHICH OF THE FUND'S HOLDINGS WERE WEAK PERFORMERS DURING THE REPORTING PERIOD?
The Fund's position in the convertible bonds of Whole Foods Market showed poor
performance after the company reported that same-store sales growth was slowing.
The Fund's shares and convertible bonds of Merrill Lynch and KKR Financial
detracted from performance because of setbacks in the companies' subprime
mortgage holdings.
Synthetic convertible bonds of Boston Scientific suffered from a slowdown in a
key implantable cardiac-device franchise. Amgen's common stock and convertible
bonds fell when studies raised doubts about a key cancer drug.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
We initiated a position in convertible preferred shares of Vale Capital. The
shares appeared inexpensive relative to the company's current earnings and cash
flow, particularly in light of growing global demand for metal ores. We also
purchased the convertible bonds of General Cable on the premise that the
company's sales and earnings may increase substantially as utility companies in
the United States are forced to upgrade aging transmission and distribution
networks.
We sold the Fund's position in the convertible bonds of telecommunications
company NII Holdings after we sensed that increasing competition might slow the
company's growth in Mexico. We sold the Fund's convertible bonds of EDO after
the company received a takeover offer from ITT.
WERE THERE ANY CHANGES IN THE FUND'S WEIGHTINGS DURING THE REPORTING PERIOD?
Yes, there were several changes across various industry groups. We reduced the
Fund's energy weighting to lock in profits. The move also helped lower risk by
preventing a single sector from constituting more than 25% of Fund assets. We
also reduced the Fund's exposure to industrials with the sale of Wesco
convertible bonds. The Fund's consumer discretionary weighting increased
slightly
Issuers of convertible securities may not be as financially strong as issuers of
securities with higher credit ratings and may be more vulnerable to changes in
the economy. If an issuer stops making interest payments, principal payments or
both on its convertible securities, these securities may become worthless and
the Fund could lose its entire investment in them. High-yield securities ("junk
bonds") are generally considered speculative because they present a greater risk
of loss than higher-quality debt securities and may be subject to greater price
volatility. Foreign securities may be subject to greater risks than U.S.
investments, including currency fluctuations, less-liquid trading markets,
greater price volatility, political and economic instability, less publicly
available information, and changes in tax or currency laws or monetary policy.
These risks are likely to be greater in emerging markets than in developed
markets. The Fund may experience a portfolio turnover rate of more than 100% and
may generate taxable short-term capital gains.
1. See footnote on page 6 for more information on the Merrill Lynch All
Convertible Securities Index.
2. See footnote on page 6 for more information on Lipper Inc.
www.mainstayfunds.com 9
when we added to an existing position in General Motors' convertible preferred
shares. The Fund's technology weighting increased modestly with the purchase of
Sybase convertible bonds and the market appreciation in our position in EMC.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2007, the Fund was significantly overweight relative to the
Merrill Lynch All Convertible Securities Index in the energy sector and slightly
overweight in health care. On the same date, the Fund was underweight relative
to its benchmark in financials and utilities.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecast made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
10 MainStay Convertible Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE SECURITIES (83.3%)+
CONVERTIBLE BONDS (71.1%)
- ------------------------------------------------------------------------------
ADVERTISING (0.8%)
Interpublic Group of Cos., Inc.
4.50%, due 3/15/23 $4,040,000 $ 4,343,000
------------
AEROSPACE & DEFENSE (5.7%)
AAR Corp.
1.75%, due 2/1/26 3,243,000 4,065,910
DRS Technologies, Inc.
2.00%, due 2/1/26 (a) 6,781,000 7,509,957
L-3 Communications Corp.
3.00%, due 8/1/35 (a) 6,455,000 7,842,825
Triumph Group, Inc.
2.625%, due 10/1/26 (a) 993,000 1,566,458
2.625%, due 10/1/26 (b) 5,700,000 8,991,750
------------
29,976,900
------------
AIRLINES (1.2%)
AMR Corp.
4.50%, due 2/15/24 5,009,000 6,355,169
------------
AUTO MANUFACTURERS (0.9%)
Ford Motor Co.
4.25%, due 12/15/36 3,855,000 4,635,638
------------
AUTO PARTS & EQUIPMENT (0.4%)
ArvinMeritor, Inc.
4.00%, due 2/15/27
(zero coupon), beginning 2/15/19 (a)(b) 2,415,000 2,025,581
------------
BIOTECHNOLOGY (2.7%)
Amgen, Inc.
0.125%, due 2/1/11 (a) 4,590,000 4,400,663
0.125%, due 2/1/11 5,275,000 5,057,406
Citigroup Funding, Inc.
(Genentech, Inc.)
0.50%, due 2/3/11 (c) 5,225,000 4,734,895
------------
14,192,964
------------
COMPUTERS (5.3%)
V Credit Suisse USA, Inc.
(Hewlett-Packard Co.)
1.00%, due 3/23/11 (c) 10,340,000 13,650,868
EMC Corp.
1.75%, due 12/1/11 (a) 7,215,000 12,175,313
1.75%, due 12/1/11 1,288,000 2,173,500
------------
27,999,681
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
DIVERSIFIED FINANCIAL SERVICES (3.4%)
V Merrill Lynch & Co., Inc.
(zero coupon), due 3/13/32 $15,943,000 $ 17,809,925
------------
ELECTRICAL COMPONENTS & EQUIPMENT (1.4%)
General Cable Corp.
1.00%, due 10/15/12 (a) 6,725,000 7,355,468
------------
ELECTRONICS (2.9%)
V Fisher Scientific International, Inc.
3.25%, due 3/1/24 (b) 9,730,000 15,482,862
------------
ENERGY--ALTERNATE SOURCES (2.9%)
V Covanta Holding Corp.
1.00%, due 2/1/27 13,986,000 15,489,495
------------
ENVIRONMENTAL CONTROL (1.8%)
Waste Connections, Inc.
3.75%, due 4/1/26 (a) 2,510,000 2,930,425
3.75%, due 4/1/26 (b) 5,460,000 6,374,550
------------
9,304,975
------------
FOOD (3.5%)
Lehman Brothers Holdings, Inc.
(Whole Foods Market, Inc.) Series WFMI
1.25%, due 2/6/14 (c) 11,978,000 12,978,163
Spartan Stores, Inc.
3.375%, due 5/15/27 (a) 5,749,000 5,317,825
------------
18,295,988
------------
HEALTH CARE--PRODUCTS (5.3%)
Bear Stearns Global Asset CI
(Boston Scientific) Series BSX
0.25%, due 1/26/14 (a)(c) 2,440,000 1,991,528
Henry Schein, Inc.
3.00%, due 8/15/34 2,709,000 3,792,600
Medtronic, Inc.
1.625%, due 4/15/13 (a) 2,230,000 2,299,688
1.625%, due 4/15/13 12,553,000 12,945,281
St. Jude Medical, Inc.
1.22%, due 12/15/08 (a) 6,760,000 6,836,050
------------
27,865,147
------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE BONDS (CONTINUED)
- ------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS & WARES (1.3%)
Church & Dwight Co., Inc.
5.25%, due 8/15/33 $4,557,000 $ 7,103,224
------------
INTERNET (0.0%) ++
At Home Corp.
4.75%, due 12/15/07 (d)(e)(f)(j) 9,147,056 915
------------
MEDIA (3.4%)
Sinclair Broadcast Group, Inc.
3.00%, due 5/15/27 5,591,000 5,283,495
Walt Disney Co. (The)
2.125%, due 4/15/23 10,299,000 12,526,159
------------
17,809,654
------------
MINING (0.6%)
Newmont Mining Corp.
1.25%, due 7/15/14 (a) 1,333,000 1,689,578
1.625%, due 7/15/17 (a) 1,333,000 1,696,243
------------
3,385,821
------------
MISCELLANEOUS--MANUFACTURING (2.0%)
Barnes Group, Inc.
3.375%, due 3/15/27 (a) 2,515,000 3,615,313
3.375%, due 3/15/27 (b) 1,184,000 1,702,000
Eastman Kodak Co.
3.375%, due 10/15/33 4,883,000 5,371,299
------------
10,688,612
------------
OIL & GAS (5.9%)
Chesapeake Energy Corp.
2.50%, due 5/15/37 9,230,000 10,314,525
Pride International, Inc.
3.25%, due 5/1/33 4,660,000 6,861,850
V Transocean, Inc.
1.50%, due 5/15/21 8,450,000 13,963,625
------------
31,140,000
------------
OIL & GAS SERVICES (8.4%)
V Cameron International Corp.
2.50%, due 6/15/26 8,653,000 13,606,842
V Halliburton Co.
3.125%, due 7/15/23 8,130,000 17,123,812
V Schlumberger, Ltd.
1.50%, due 6/1/23 5,122,000 13,675,740
------------
44,406,394
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
PHARMACEUTICALS (5.8%)
Teva Pharmaceutical Finance Co. B.V.
Series D
1.75%, due 2/1/26 (b) $4,908,000 $ 5,239,290
V Teva Pharmaceutical Finance LLC
Series A
0.50%, due 2/1/24 (b) 10,858,000 13,233,188
Watson Pharmaceuticals, Inc.
1.75%, due 3/15/23 3,820,000 3,710,175
Wyeth
4.886%, due 1/15/24 (b)(g) 7,580,000 8,127,731
------------
30,310,384
------------
SOFTWARE (1.3%)
Sybase, Inc.
1.75%, due 2/22/25 5,641,000 6,980,738
------------
TELECOMMUNICATIONS (4.2%)
Lucent Technologies, Inc.
Series A
2.875%, due 6/15/23 3,622,000 3,477,120
RF Micro Devices, Inc.
0.75%, due 4/15/12 (b) 8,054,000 7,943,258
SBA Communications Corp.
0.375%, due 12/1/10 (a) 7,392,000 8,583,960
0.375%, due 12/1/10 (b) 1,689,000 1,961,351
------------
21,965,689
------------
Total Convertible Bonds
(Cost $333,281,924) 374,924,224
------------
<Caption>
SHARES
CONVERTIBLE PREFERRED STOCKS (12.2%)
- ------------------------------------------------------------------------------
AUTO MANUFACTURERS (2.6%)
V General Motors Corp.
6.25% Series C 523,400 13,451,380
------------
CHEMICALS (1.6%)
Celanese Corp.
4.25% 156,210 8,393,163
------------
</Table>
12 MainStay Convertible Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
CONVERTIBLE PREFERRED STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (1.2%)
Affiliated Managers Group, Inc.
5.10% 110,600 $ 6,318,025
------------
INSURANCE (2.0%)
MetLife, Inc.
6.375% 320,800 10,753,216
------------
INVESTMENT COMPANIES (1.0%)
Vale Capital, Ltd.
5.50% Series RIO 74,850 5,480,517
------------
MINING (1.3%)
Freeport-McMoRan Copper & Gold, Inc.
6.75% 41,560 7,088,474
------------
PHARMACEUTICALS (1.9%)
Schering-Plough Corp.
6.00% 37,000 9,851,250
------------
TELECOMMUNICATIONS (0.6%)
Lucent Technologies Capital Trust I
7.75% 3,307 3,203,656
------------
Total Convertible Preferred Stocks
(Cost $53,588,168) 64,539,681
------------
Total Convertible Securities
(Cost $386,870,092) 439,463,905
------------
COMMON STOCKS (10.0%)
- ------------------------------------------------------------------------------
AEROSPACE & DEFENSE (0.2%)
Argon ST, Inc. (h) 54,400 1,099,424
------------
AUTO MANUFACTURERS (0.0%) ++
Ford Motor Co. (h) 1 8
------------
ELECTRONICS (0.2%)
Axsys Technologies, Inc. (h) 28,200 1,110,516
------------
ENGINEERING & CONSTRUCTION (1.0%)
McDermott International, Inc. (h) 84,700 5,171,782
------------
</Table>
<Table>
<Caption>
SHARES VALUE
HEALTH CARE-PRODUCTS (2.3%)
Boston Scientific Corp. (h) 284,600 $ 3,947,402
Johnson & Johnson 122,000 7,950,740
------------
11,898,142
------------
OIL & GAS (1.0%)
Hess Corp. 71,800 5,141,598
------------
OIL & GAS SERVICES (1.1%)
Baker Hughes, Inc. 26,300 2,280,735
Gulf Island Fabrication, Inc. 16,900 590,148
ION Geophysical Corp. (b)(h) 192,000 2,908,800
------------
5,779,683
------------
RETAIL (2.0%)
Costco Wholesale Corp. 159,803 10,748,350
------------
SOFTWARE (1.8%)
Microsoft Corp. 259,500 9,552,195
------------
TRANSPORTATION (0.4%)
Tidewater, Inc. 37,600 2,055,592
------------
Total Common Stocks
(Cost $40,459,668) 52,557,290
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (14.3%)
- ------------------------------------------------------------------------------
COMMERCIAL PAPER (6.2%)
American Express Credit Corp.
4.75%, due 11/1/07 $5,000,000 5,000,000
Deutsche Bank Financial LLC
4.77%, due 11/1/07 5,830,000 5,830,000
Emerson Electric Co.
4.65%, due 11/7/07 (a) 5,000,000 4,996,125
National Australia Funding Delaware, Inc.
4.52%, due 11/9/07 (a) 5,000,000 4,994,978
Prudential Funding LLC
4.65%, due 11/1/07 5,000,000 5,000,000
Societe Generale North America, Inc.
4.685%, due 11/6/07 7,000,000 6,995,445
------------
Total Commercial Paper
(Cost $32,816,548) 32,816,548
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- ------------------------------------------------------------------------------
INVESTMENT COMPANY (8.1%)
State Street Navigator Securities Lending Prime
Portfolio (i) 42,724,209 $ 42,724,209
------------
Total Investment Company
(Cost $42,724,209) 42,724,209
------------
Total Short-Term Investments
(Cost $75,540,757) 75,540,757
------------
Total Investments
(Cost $502,870,517) 107.6% 567,561,952(k)
Liabilities in Excess of
Cash and Other Assets (7.6) (40,319,607)
----------- ------------
Net Assets 100.0% $527,242,345
=========== ============
</Table>
<Table>
++ Less than one-tenth of a percent.
(a) May be sold to institutional investors only under Rule 144a or securities
offered pursuant to Section 4(2) of the Securities Act of 1933, as amended.
(b) Represents a security, or a portion thereof, which is out on loan. The
aggregate market value of such securities is $41,627,572; cash collateral
of $42,724,209 (included in liabilities) was received with which the Fund
purchased highly liquid short-term investments.
(c) Synthetic Convertible--An equity-linked security issued by an entity other
than the issuer of the underlying equity instrument.
(d) Illiquid security. The total market value of the security at October 31,
2007 is $915, which represents 0.0% of the Fund's net assets.
(e) Issue in default.
(f) Fair valued security. The total market value of the security at October 31,
2007 is $915, which reflects 0.0% of the Fund's net assets.
(g) Floating rate. Rate shown is the rate in effect at October 31, 2007.
(h) Non-income producing security.
(i) Represents a security, or a portion thereof, purchased with cash collateral
received for securities on loan.
(j) Restricted security.
(k) At October 31, 2007, cost is $504,923,556 for federal income tax purposes
and net unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $68,044,688
Gross unrealized depreciation (5,406,292)
-----------
Net unrealized appreciation $62,638,396
===========
</Table>
14 MainStay Convertible Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2007
<Table>
ASSETS:
Investment in securities, at value (identified
cost $502,870,517) including $41,627,572
market value of securities loaned $567,561,952
Cash 15,272
Receivables:
Investment securities sold 3,953,791
Dividends and interest 1,865,940
Fund shares sold 1,086,081
Other assets 15,180
-------------
Total assets 574,498,216
-------------
LIABILITIES:
Securities lending collateral 42,724,209
Payables:
Investment securities purchased 3,336,919
Fund shares redeemed 323,566
Manager (See Note 3) 301,659
Transfer agent (See Note 3) 220,993
NYLIFE Distributors (See Note 3) 216,307
Shareholder communication 89,080
Professional fees 26,628
Trustees 5,999
Custodian 5,501
Accrued expenses 5,010
-------------
Total liabilities 47,255,871
-------------
Net assets $527,242,345
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized $ 306,748
Additional paid-in capital 423,815,473
-------------
424,122,221
Accumulated distributions in excess of net
investment income (299,494)
Accumulated net realized gain on investments 38,728,183
Net unrealized appreciation on investments 64,691,435
-------------
Net assets $527,242,345
=============
CLASS A
Net assets applicable to outstanding shares $379,147,937
=============
Shares of beneficial interest outstanding 22,070,532
=============
Net asset value per share outstanding $ 17.18
Maximum sales charge (5.50% of offering price) 1.00
-------------
Maximum offering price per share outstanding $ 18.18
=============
CLASS B
Net assets applicable to outstanding shares $116,936,634
=============
Shares of beneficial interest outstanding 6,792,881
=============
Net asset value and offering price per share
outstanding $ 17.21
=============
CLASS C
Net assets applicable to outstanding shares $ 31,157,774
=============
Shares of beneficial interest outstanding 1,811,390
=============
Net asset value and offering price per share
outstanding $ 17.20
=============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 15
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2007
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 6,853,336
Dividends 3,989,778
Income from securities loaned--net 170,036
------------
Total income 11,013,150
------------
EXPENSES:
Manager (See Note 3) 3,377,137
Transfer agent (See Note 3) 1,301,359
Distribution/Service--Class A (See Note 3) 869,165
Service--Class B (See Note 3) 291,506
Service--Class C (See Note 3) 64,827
Distribution--Class B (See Note 3) 874,519
Distribution--Class C (See Note 3) 194,480
Professional fees 111,174
Shareholder communication 107,878
Recordkeeping 75,686
Registration 54,082
Trustees 26,751
Custodian 21,160
Miscellaneous 24,272
------------
Total expenses before waiver/reimbursement 7,393,996
Expense waiver/reimbursement from Manager
(See Note 3) (474,044)
------------
Net expenses 6,919,952
------------
Net investment income 4,093,198
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 64,563,335
Net change in unrealized appreciation on
investments 21,110,467
------------
Net realized and unrealized gain on investments 85,673,802
------------
Net increase in net assets resulting from
operations $89,767,000
============
</Table>
16 MainStay Convertible Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2007 AND OCTOBER 31, 2006
<Table>
<Caption>
2007 2006
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 4,093,198 $ 4,783,414
Net realized gain on investments 64,563,335 23,369,269
Net change in unrealized
appreciation on investments 21,110,467 20,900,326
----------------------------
Net increase in net assets
resulting from operations 89,767,000 49,053,009
----------------------------
Dividends to shareholders:
From net investment income:
Class A (5,208,343) (3,056,752)
Class B (901,848) (813,303)
Class C (189,892) (90,324)
----------------------------
Total dividends to shareholders (6,300,083) (3,960,379)
----------------------------
Capital share transactions:
Net proceeds from sale of shares 47,029,928 71,927,349
Net asset value of shares issued to
shareholders in reinvestment of
dividends 5,739,980 3,586,091
Cost of shares redeemed (95,239,290) (142,512,603)
Net asset value of shares converted (See Note 1):
Class A 8,819,241 225,467,092
Class B (8,819,241) (225,467,092)
----------------------------
Decrease in net assets derived
from capital share transactions (42,469,382) (66,999,163)
----------------------------
Net increase (decrease) in net
assets 40,997,535 (21,906,533)
NET ASSETS:
Beginning of year 486,244,810 508,151,343
----------------------------
End of year $527,242,345 $ 486,244,810
============================
Accumulated undistributed
(distributions in excess of) net
investment income at end of year $ (299,494) $ 1,898,136
============================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of period $ 14.51 $ 13.28 $ 12.10 $ 11.78 $ 10.31 $ 11.58
-------- -------- ------- ------- ----------- ------------
Net investment income 0.16(a) 0.16(a) 0.18(b) 0.15 0.16 0.25
Net realized and unrealized gain (loss) on
investments 2.74 1.23 1.17 0.34 1.46 (1.27)
Net realized and unrealized gain on
foreign currency transactions -- -- -- -- -- 0.00(c)
-------- -------- ------- ------- ----------- ------------
Total from investment operations 2.90 1.39 1.35 0.49 1.62 (1.02)
-------- -------- ------- ------- ----------- ------------
Less dividends:
From net investment income (0.23) (0.16) (0.17) (0.17) (0.15) (0.25)
-------- -------- ------- ------- ----------- ------------
Net asset value at end of period $ 17.18 $ 14.51 $ 13.28 $ 12.10 $ 11.78 $ 10.31
======== ======== ======= ======= =========== ============
Total investment return (d) 20.10% 10.57% 11.21% 4.11% 15.86%(e) (8.88%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.05% 1.14% 1.38%(b) 1.22% 1.85%+ 2.30%
Net expenses 1.19% 1.20% 1.20% 1.34% 1.38%+ 1.37%
Expenses (before waiver/reimbursement) 1.29% 1.39% 1.38% 1.35% 1.38%+ 1.37%
Portfolio turnover rate 113% 72% 93% 96% 73% 94%
Net assets at end of period (in 000's) $379,148 $340,331 $93,996 $95,015 $89,751 $68,871
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of period $ 14.53 $ 13.29 $ 12.11 $ 11.79 $ 10.33 $ 11.59
------- ------- ------- ------- ----------- ------------
Net investment income 0.05(a) 0.07(a) 0.08(b) 0.06 0.10 0.17
Net realized and unrealized gain (loss) on
investments 2.73 1.22 1.17 0.33 1.45 (1.27)
Net realized and unrealized gain on
foreign currency transactions -- -- -- -- -- 0.00(c)
------- ------- ------- ------- ----------- ------------
Total from investment operations 2.78 1.29 1.25 0.39 1.55 (1.10)
------- ------- ------- ------- ----------- ------------
Less dividends:
From net investment income (0.11) (0.05) (0.07) (0.07) (0.09) (0.16)
------- ------- ------- ------- ----------- ------------
Net asset value at end of period $ 17.20 $ 14.53 $ 13.29 $ 12.11 $ 11.79 $ 10.33
======= ======= ======= ======= =========== ============
Total investment return (d) 19.27% 9.73% 10.35% 3.32% 15.09%(e) (9.50%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 0.30% 0.49% 0.63%(b) 0.47% 1.10%+ 1.55%
Net expenses 1.94% 1.95% 1.95% 2.09% 2.13%+ 2.12%
Expenses (before waiver/reimbursement) 2.04% 2.14% 2.13% 2.10% 2.13%+ 2.12%
Portfolio turnover rate 113% 72% 93% 96% 73% 94%
Net assets at end of period (in 000's) $31,158 $24,640 $23,992 $27,041 $26,079 $15,289
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Net investment income and the ratio of net investment income includes $0.01 per share and
0.07%, respectively, as a result of a special one time dividend from Microsoft Corp.
</Table>
<Table>
(c) Less than one cent per share.
(d) Total return is calculated exclusive of sales charges.
(e) Total return is not annualized.
</Table>
18 MainStay Convertible Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
-------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
$ 14.54 $ 13.29 $ 12.11 $ 11.79 $ 10.33 $ 11.59
-------- -------- -------- -------- ----------- ------------
0.05(a) 0.09(a) 0.08(b) 0.06 0.10 0.17
2.73 1.21 1.17 0.33 1.45 (1.27)
-- -- -- -- -- 0.00(c)
-------- -------- -------- -------- ----------- ------------
2.78 1.30 1.25 0.39 1.55 (1.10)
-------- -------- -------- -------- ----------- ------------
(0.11) (0.05) (0.07) (0.07) (0.09) (0.16)
-------- -------- -------- -------- ----------- ------------
$ 17.21 $ 14.54 $ 13.29 $ 12.11 $ 11.79 $ 10.33
======== ======== ======== ======== =========== ============
19.25% 9.81% 10.35% 3.32% 15.09%(e) (9.50%)
0.31% 0.68% 0.63%(b) 0.47% 1.10%+ 1.55%
1.94% 1.95% 1.95% 2.09% 2.13%+ 2.12%
2.04% 2.14% 2.13% 2.10% 2.13%+ 2.12%
113% 72% 93% 96% 73% 94%
$116,937 $121,274 $390,163 $430,326 $470,459 $436,572
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises nineteen funds (collectively referred to as the
"Funds"). These financial statements and notes relate only to MainStay
Convertible Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Class A shares commenced on
January 3, 1995. Class B shares commenced on May 1, 1986. Class C shares
commenced on September 1, 1998. Class A shares are offered at net asset value
per share plus an initial sales charge. No sales charge applies on investments
of $1 million or more (and certain other qualified purchases) in Class A shares,
but a contingent deferred sales charge is imposed on certain redemptions of such
shares within one year of the date of purchase. Class B shares and Class C
shares are offered without an initial sales charge, although a declining
contingent deferred sales charge may be imposed on redemptions made within up to
six years of purchase of Class B shares and a 1% contingent deferred sales
charge may be imposed on redemptions made within one year of purchase of Class C
shares. As approved by the Board of Trustees in 1997, Class B shares convert to
Class A shares eight years after the date they were purchased. The three classes
of shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that Class
B and Class C shares are subject to higher distribution fee rates than Class A
shares under a distribution plan pursuant to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to seek capital appreciation together with
current income.
The Fund invests in high yield securities (sometimes called "junk bonds"), which
are generally considered speculative because they present a greater risk of
loss, including default, than higher quality debt securities. These securities
pay a premium--a high interest rate or yield--because of the increased risk of
loss. These securities can also be subject to greater price volatility.
The Fund also invests in foreign securities, which carry certain risks that are
in addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country, industry or region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent or brokers selected by the Fund's Manager, as defined in Note 3,
whose prices reflect broker/dealer supplied valuations and electronic data
processing techniques, if such prices are deemed by the Fund's Manager to be
representative of market values, at the regular close of trading of the New York
Stock Exchange (generally 4:00 p.m. Eastern time) on each day the Fund is open
for business.
Equity securities are valued at the latest quoted sales prices as of the close
of trading on the New York Stock Exchange on each day the Fund is open for
business ("valuation date"). Securities that are not traded on the valuation
date are valued at the mean of the latest quoted bid and asked prices. Prices
normally are taken from the principal market in which each security trades.
Investments in mutual funds are valued at their net asset value as of the close
of the New York Stock Exchange on the date of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: a security the trading for which has been
halted or suspended; a debt security that has recently gone into default and for
which there is not a current market quotation; a security of an issuer that has
entered into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; a security where the trading on that security's principal market
is temporarily closed at a time when, under normal conditions, it would be open.
At October 31, 2007, the Fund held securities with a value of $915 that were
valued in such a manner.
20 MainStay Convertible Fund
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. These events may include, but are not limited to, situations
relating to a single issue in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. Should the
Manager or Subadvisor, as defined in Note 3, conclude that such events may have
effected the accuracy of the last price reported on the local foreign market,
the Manager or Subadvisor may, pursuant to procedures adopted by the Fund,
adjust the value of the local price to reflect the impact on the price of such
securities as a result of such events. Additionally, international equity
securities are also fair valued whenever the movement of a particular index
exceeds certain thresholds. In such cases, the securities are fair valued by
applying factors provided by a third party vendor in accordance with the Fund's
policies and procedures.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
of net investment income quarterly and distributions of net realized capital and
currency gains, if any, annually. All dividends and distributions are reinvested
in shares of the Fund, at net asset value, unless the shareholder elects
otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America. Permanent
book/tax differences relating to income and gains are reclassified amongst
undistributed net investment income, accumulated net realized gain or loss and
paid-in-capital.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities
purchased, other than short-term securities, for the Fund are accreted and
amortized, respectively, on the constant yield method over the life of the
respective securities or, in the case of a callable security, over the period to
the first date of call. Discounts and premiums on short-term securities are
accreted and amortized, respectively, on the straight line method. Income from
payment-in-kind securities is recorded daily based on the effective interest
method of accrual.
The investment income and realized and unrealized gains and losses on
investments of the Fund are allocated to separate classes of shares based upon
their relative net assets on the date the income is earned or realized and
unrealized gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B) on
page 23) are allocated to separate classes of shares pro rata based upon their
relative net assets value on the date the expenses are incurred. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) SECURITIES LENDING. In order to realize additional income the Fund may lend
its securities to broker-dealers and financial institutions. The loans are
collateralized by cash or securities at least equal at all times to the market
value of the securities loaned. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. The Fund may bear
the risk of delay in recovery of, or loss of rights in, the securities loaned
should the borrower of the securities experience financial difficulty. The Fund
receives compensation for lending its securities in the form of fees or it
retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(H) RESTRICTED SECURITIES. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933. The Fund may not
have the right to demand that such securities be registered. Disposal of these
securities may involve time-consuming negotiations and expenses and it may be
difficult to obtain a prompt sale at an acceptable price. (See Note 5 on page
24.)
(I) INDEMNIFICATIONS. In the normal course of business, the Fund enters into
contracts with third party service
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
providers that contain a variety of representations and warranties and which
provide general indemnifications. The Fund's maximum exposure under these
arrangements is unknown, as this would involve future claims that may be made
against the Fund that have not yet occurred. Based on experience, management is
of the view that the risk of loss in connection with these potential
indemnification obligations is remote. However, there can be no assurance that
material liabilities related to such obligations will not arise in the future
which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager") a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. NYLIM provides offices and conducts clerical, recordkeeping and
bookkeeping services, and is responsible for the financial and accounting
records required to be maintained by the Fund. NYLIM also pays the salaries and
expenses of all personnel affiliated with the Fund and all the operational
expenses that are not the responsibility of the Fund. MacKay Shields LLC (the
"Subadvisor"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life, serves as subadvisor to the Fund and is responsible
for the day-to-day portfolio management of the Fund. Pursuant to the terms of a
Subadvisory Agreement between NYLIM and the Subadvisor, NYLIM pays for the
services of the Subadvisor.
The Fund is contractually obligated to pay NYLIM a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.60% on assets up to $500 million, 0.55% on assets from
$500 million to $1 billion and 0.50% on assets in excess of $1 billion. Prior to
August 1, 2007, the Fund was contractually obligated to pay the Manager a
monthly fee for services performed and facilities furnished at an annual rate of
the Fund's average daily net assets as follows: 0.72% on assets up to $500
million, 0.67% on assets from $500 million to $1 billion and 0.62% on assets in
excess of $1 billion. NYLIM had voluntarily agreed to waive its management fee
by 0.05% to 0.67% on assets up to $500 million to 0.62% on assets from $500
million to $1 billion and to 0.57% on assets in excess of $1 billion, which is
not recoupable.
Effective August 1, 2007, NYLIM has entered into a written expense limitation
agreement under which it has agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses (total annual operating expenses
excluding taxes, interest, litigation, extraordinary expenses, and brokerage and
other transaction expenses relating to the purchase or sale of portfolio
investments) do not exceed the following amounts of average daily net assets for
each class: Class A, 1.175%; Class B, 1.925%; and Class C, 1.925%. This expense
limitation may be modified or terminated only with the approval of the Board of
Trustees. NYLIM may recoup the amount of any management fee waivers or expense
reimbursements from the Fund pursuant to the agreement if such action does not
cause the Fund to exceed existing expense limitations and the recoupment is made
within three years after the year in which NYLIM incurred the expense. Between
March 1, 2007 and August 1, 2007, NYLIM had entered into a written expense
limitation agreement under which it had agreed to waive a portion of the Fund's
management fee or reimburse the expenses of the appropriate class of the Fund so
that the class' total ordinary operating expenses (total annual operating
expenses excluding taxes, interest, litigation, extraordinary expenses, and
brokerage and other transaction expenses relating to the purchase or sale of
portfolio investments) did not exceed the following amounts of average daily net
assets for each class: Class A, 1.20%; Class B, 1.95%; and Class C, 1.95%.
For the year ended October 31, 2007, NYLIM earned fees from the Fund in the
amount of $3,377,137 and waived its fees in the amount of $474,044 of which
$291,912 is recoupable.
As of October 31, 2007, the amounts of waived fees that are subject to possible
recoupment by NYLIM, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 2010 TOTAL
$213,955 $701,502 $291,912 $1,207,369
- -----------------------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Prior to March 1, 2007, the Manager had an agreement in place under which it had
agreed to waive a portion of the Fund's management fee or reimburse the expenses
of the Fund so that the Fund's total ordinary operating expenses did not exceed
1.20% of the Fund's average daily net assets for its Class A shares. NYLIM also
applied an equivalent waiver or reimbursement, in an equal amount of basis
points, to the other share classes of the Fund.
State Street Bank & Trust Company ("SSBT"), One Lincoln Street, Boston,
Massachusetts, 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with NYLIM. These services include calculating
daily net asset values of the Fund, maintaining general ledger and sub-ledger
accounts for the calculation of the Fund's respective net asset values, and
assisting NYLIM in conducting various aspects of the Fund's
22 MainStay Convertible Fund
administrative operations. For providing these services to the Fund, SSBT is
compensated by NYLIM.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted distribution plans (the "Plans") in accordance
with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives a monthly distribution
fee from the Fund at an annual rate of 0.25% of the average daily net assets of
the Fund's Class A shares, which is an expense of the Class A shares of the Fund
for distribution or service activities as designated by the Distributor.
Pursuant to the Class B and Class C Plans, the Fund pays the Distributor a
monthly distribution fee, which is an expense of the Class B and Class C shares
of the Fund, at the annual rate of 0.75% of the average daily net assets of the
Fund's Class B and Class C shares. The Plans provide that the Class B and Class
C shares of the Fund also incur a service fee at the annual rate of 0.25% of the
average daily net asset value of the Class B and Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $56,454 for the year ended
October 31, 2007. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $1,758, $145,948 and $2,130, respectively, for the year ended October
31, 2007.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund, for the year ended October 31, 2007,
amounted to $1,301,359.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts, effective March 1, 2007. Shareholders with an account
balance of less than $1,000 are charged an annual per account fee of $20
(assessed semi-annually).
(F) CAPITAL. At October 31, 2007, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $290,026 0.1%
- ------------------------------------------------------------------
Class C 150 0.0*
- ------------------------------------------------------------------
</Table>
* Less than one-tenth of a percent.
(G) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2007, these fees, which are included in professional fees
shown on the Statement of Operations, were $18,272.
The Fund pays the Manager a monthly fee for certain pricing and recordkeeping
services provided under the Accounting Agreement at the annual rate of 1/20 of
1% for the first $20 million of average monthly net assets, 1/30 of 1% of the
next $80 million of average monthly net assets and 1/100 of 1% of any amount in
excess of $100 million of average monthly net assets. Fees for these services
provided to the Fund by the Manager amounted to $75,686 for the year ended
October 31, 2007.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2007, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL TEMPORARY APPRECIATION ACCUMULATED
INCOME GAINS (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$1,179,310 $39,460,677 $ (158,259) $62,638,396 $103,120,124
------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized appreciation is
primarily due to wash sale deferrals.
The other temporary differences are primarily due to defaulted bond releases,
tax treatment of Contingent Obligations, and unreversed wash sale deferrals.
The following table discloses the current year reclassifications between
accumulated distributions in excess of net investment income and accumulated net
realized gain on investments, arising from permanent differences; net assets at
October 31, 2007 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) PAID-IN
INCOME (LOSS) ON INVESTMENTS CAPITAL
$9,255 $ (9,255) $ --
-----------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to paydowns gain (loss).
The Fund utilized $25,190,322 of capital loss carryforwards during the year
ended October 31, 2007.
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The tax character of distributions paid during the years ended October 31, 2007
and October 31, 2006, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2007 2006
Distributions paid from:
Ordinary Income $6,300,083 $3,960,379
- -------------------------------------------------------------
</Table>
NOTE 5--RESTRICTED SECURITIES:
As of October 31, 2007, the Fund held restricted securities as follows:
<Table>
<Caption>
DATE(S) OF PRINCIPAL 10/31/07 PERCENTAGE OF
SECURITY ACQUISITION AMOUNT COST VALUE NET ASSETS
At Home Corp.
Convertible Bond 7/25/01 $9,147,056 $ 674,023 $ 915 0.0%(a)
- ------------------------------------------------------------------------------------
</Table>
(a) Less than one-tenth of one percent.
NOTE 6--CUSTODIAN:
SSBT is the custodian of cash and securities of the Fund. Custodial fees are
charged to the Fund based on the market value of securities in the Fund and the
number of certain cash transactions incurred by the Fund.
NOTE 7--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. These funds pay a commitment fee, at an annual rate of .060% of the
average commitment amount, regardless of usage, to The Bank of New York, which
acts as agent to the syndicate. Such commitment fees are allocated among the
funds based upon net assets and other factors. Interest on any revolving credit
loan is charged based upon the Federal Funds Advances rate. There were no
borrowings made or outstanding on the line of credit during the year ended
October 31, 2007.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2007, purchases and sales of securities, other
than short-term securities, were $538,807 and $599,902, respectively.
NOTE 9--CAPITAL SHARE TRANSACTIONS
(IN 000'S):
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 2,087 $ 33,270
Shares issued to shareholders in
reinvestment of dividends: 311 4,794
Shares redeemed (4,342) (67,480)
--------------------
Net decrease in shares outstanding
before conversion (1,944) (29,416)
Shares converted from Class B (See Note
1) 561 8,819
--------------------
Net decrease (1,383) $(20,597)
====================
Year ended October 31, 2006:
Shares sold 4,257 $ 58,977
Shares issued to shareholders in
reinvestment of dividends: 199 2,779
Shares redeemed (4,563) (64,307)
--------------------
Net increase (decrease) in shares
outstanding before conversion (107) (2,551)
Shares converted from Class B (See Note
1) 16,482 225,467
--------------------
Net increase 16,375 $222,916
====================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 477 $ 7,518
Shares issued to shareholders in
reinvestment of dividends: 54 807
Shares redeemed (1,518) (23,419)
---------------------
Net decrease in shares outstanding
before conversion (987) (15,094)
Shares reacquired upon conversion into
Class A (See Note 1) (560) (8,819)
---------------------
Net decrease (1,547) $ (23,913)
=====================
Year ended October 31, 2006:
Shares sold 631 $ 8,898
Shares issued to shareholders in
reinvestment of dividends: 53 741
Shares redeemed (5,236) (72,576)
---------------------
Net decrease in shares outstanding
before conversion (4,552) (62,937)
Shares reacquired upon conversion into
Class A (See Note 1) (16,457) (225,467)
---------------------
Net decrease (21,009) $(288,404)
=====================
</Table>
24 MainStay Convertible Fund
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 385 $ 6,242
Shares issued to shareholders in
reinvestment of dividends: 9 139
Shares redeemed (279) (4,340)
-------------------
Net increase 115 $ 2,041
===================
Year ended October 31, 2006:
Shares sold 287 $ 4,052
Shares issued to shareholders in
reinvestment of dividends: 5 66
Shares redeemed (401) (5,629)
-------------------
Net decrease (109) $(1,511)
===================
</Table>
NOTE 10--OTHER MATTERS:
In 2004 the Securities and Exchange Commission ("SEC") raised concerns relating
to a guarantee provided to shareholders of the MainStay Equity Index Fund and
the fees and expenses of that Fund, as well as the related guaranteed disclosure
to that fund's shareholders. Discussions have been held with the SEC concerning
a possible resolution of this matter. There can be no assurance at this time as
to the outcome of these efforts. The MainStay Equity Index Fund is not a
portfolio of Eclipse Funds Inc.
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS:
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation becomes effective for the Fund's 2008 fiscal
year, and is to be applied to all open tax years as of the date of
effectiveness. Based on Management's analysis, the determination has been made
that the adoption of the interpretation on November 1, 2007, did not have an
impact on the Fund's financial statements upon adoption. Management continually
reviews the Fund's tax positions and such conclusions under the Interpretation
based on factors, including, but not limited to, on going analyses of tax laws,
regulations and interpretations, thereof.
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The changes to current generally accepted accounting
principles from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures
about fair value measurements. As of October 31, 2007, the Fund does not believe
the adoption of SFAS No. 157 will impact the amounts reported in the Fund's
financial statements. However, additional disclosures may be required about the
inputs used to develop the measurements and the effect of certain measurements
reported in the financial statements for a fiscal period.
www.mainstayfunds.com 25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Convertible Fund ("the Fund"), one
of the funds constituting The MainStay Funds, as of October 31, 2007, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the four-year period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the periods presented through October 31,
2003, were audited by other auditors, whose report dated December 18, 2003,
expressed an unqualified opinion thereon.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2007, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Convertible Fund of The MainStay Funds as of October 31, 2007, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the four-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 20, 2007
26 MainStay Convertible Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADIVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with New York Life Investment Management LLC (the "Manager") and the
Subadvisory Agreement between the Manager and MacKay Shields LLC, a wholly-owned
indirect subsidiary of New York Life Investment Management Holdings LLC, an
affiliate of the Manager, (the "Subadvisor"), (each an "Agreement") at a meeting
held on May 22 and 23, 2007. In connection with the approval of each Agreement,
the Trustees reviewed a significant amount of a wide variety of information that
they had requested and received from the Manager and the Subadvisor, and data
and analysis from an outside data provider and a third party consultant. The
Trustees considered various industry trends and regulatory developments in their
deliberations. In considering approval of each Agreement, and in evaluating the
fairness of the compensation to be paid by the Fund, the Trustees met both as a
full Board and in executive session with no Interested Trustee present, in
advance of the meeting at which the Agreements were approved, and they
considered a number of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and the Subadvisor have provided historically to the Fund, and
also generally to other series of the Trust. Among other services, the Manager's
services have included investment management services, including monitoring and
evaluating the Subadvisor's investment program and investment results with
respect to the Fund, and the Subadvisor's compliance with the Fund's investment
policies and restrictions, and administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets,
and its other services include, among other services, providing reports to the
Manager and reviewing certain aspects of Fund filings. The Trustees considered,
among other things, the Manager's and Subadvisor's management, personnel,
resources, operations and portfolio management capabilities. The Board reviewed
reports on the Subadvisor's brokerage practices, including with respect to best
execution of portfolio trades. The Trustees considered the Manager's supervision
of the Fund's service providers and its attention to the compliance program of
the Trust, the Manager, the Subadvisor and certain other service providers, as
well as the Subadvisor's attention to its compliance program. The Trustees noted
the generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's recent underperformance
and mixed performance over longer time periods.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information that indicated that the profitability to the Manager and its
affiliates from the Management Agreement with respect to the Fund and from the
overall relationship with the Trust was low. The Trustees considered other
benefits that the Manager and its affiliates receive from the relationship with
the Trust, including benefits that NYLIFE Distributors and MainStay Shareholder
Services receive in exchange for services they provide to the Funds, and certain
benefits from soft dollar arrangements. The Trustees acknowledged certain
benefits to the reputation of the Manager and the Trust from their association
with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They considered that, across the Trust
(though not every series or share class), gross transfer agency fees tended to
be relatively high and, therefore, adversely affected gross expense ratios.
Noting that the Trust historically permitted smaller investor accounts, the
Trustees considered measures that had been recently implemented that were
intended to increase the average size of shareholder accounts, including
generally higher investment minimums, and small account fees, and the Trustees
considered potential benefits to the Manager and its affiliates arising from
such measures.
www.mainstayfunds.com 27
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the Manager's willingness to reduce the
contractual management fee applicable to the Fund, with a corresponding
reduction to be made at each contractual breakpoint that would reduce the Fund's
management fee at asset levels above the breakpoints, and the fact that the
breakpoints were intended to provide that shareholders would share in benefits
from economies of scale obtained through the growth in the Fund's assets. The
Trustees noted that the Fund's management fee rate had been reduced slightly at
some points in the past year by the breakpoint schedule applicable to the Fund.
The Trustees reviewed information about the potential effect of asset growth on
Fund expenses, the difficulty of forecasting its effect on the profitability of
the Manager and its affiliates, and the management fee breakpoints applicable to
the Fund and certain other funds. It was noted that, to the extent the Fund's
gross expenses currently were higher than its net expenses,the reduction of the
Fund's gross expenses through the achievement of economies of scale might
benefit the Manager by reducing the expenses the Manager must reimburse to the
Fund rather than directly benefiting the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by the
Fund, the Trustees evaluated factors such as the fees and expenses borne by
other registered funds in the market pursuing strategies generally similar to
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts having investment strategies similar to that
of the Fund, and took account of explanations and other information relating to
the fees and expenses of those other funds and accounts. The Trustees considered
the current and proposed contractual and net management fees, its anticipated
gross and net expense ratio, and various components of the expense ratio, in
comparison to other funds in comparison groupings. The Trustees generally
acknowledged the historical relationships among the Manager, the Subadvisor and
the Trust and the likely difficulties in implementing an alternative to the
investment management arrangement between the Trust and the Manager. The
Trustees took account of the Manager's willingness to maintain the management
fee waiver and expense limitation applicable to the Fund.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings, with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. This summary set out
above describes the most important, but not all, of the factors considered by
the Trustees in considering each Agreement. On the basis of their review, a
majority of the Trustees and a majority of the Non-Interested Trustees concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the judgment of a
majority of the Trustees and a majority of the Non-Interested Trustees that
approval of each Agreement was in the best interests of the Fund and its
shareholders.
28 MainStay Convertible Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2007,
should be multiplied by 43.3% to arrive at the amount eligible for qualified
dividend income, 70.2% for qualified interest income and 73.8% for the corporate
dividends received deduction.
In January 2008, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2007. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2007.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
or (iii) on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain and review copies of
Form N-Q by visiting the SEC's Public Reference Room in Washington, DC
(information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330).
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of The MainStay Funds (the
"Trust") was held on May 4, 2007, at the offices of New York Life Investment
Management LLC in Parsippany, New Jersey. The purpose of the meeting was to
elect the following individuals to the Board of Trustees of the Trust:
- Susan B. Kerley
- Alan R. Latshaw
- Peter Meenan
- Richard H. Nolan, Jr.
- Richard S. Trutanic
- Roman L. Weil
- John A. Weisser
- Brian A. Murdock (Interested Trustee)
There are no other Trustees of the Trust.
No other business came before the special meeting. The proposal to elect
Trustees was passed by the shareholders of the Fund as shown below:
<Table>
<Caption>
VOTES VOTES
CONVERTIBLE FUND FOR WITHHELD ABSTENTIONS TOTAL
Susan B. Kerley 16,111,869.922 108,324.465 53,209.000 16,273,403.387
- --------------------------------------------------------------------------------------
Alan R. Latshaw 16,108,853.646 111,340.741 53,209.000 16,273,403.387
- --------------------------------------------------------------------------------------
Peter Meenan 16,112,599.861 107,594.526 53,209.000 16,273,403.387
- --------------------------------------------------------------------------------------
Richard H.
Nolan, Jr. 16,111,700.569 108,493.818 53,209.000 16,273,403.387
- --------------------------------------------------------------------------------------
Richard S.
Trutanic 16,114,664.452 105,529.935 53,209.000 16,273,403.387
- --------------------------------------------------------------------------------------
Roman L. Weil 16,106,693.950 113,500.437 53,209.000 16,273,403.387
- --------------------------------------------------------------------------------------
John A. Weisser 16,110,689.195 109,505.192 53,209.000 16,273,403.387
- --------------------------------------------------------------------------------------
Brian A. Murdock 16,106,253.820 113,940.567 53,209.000 16,273,403.387
- --------------------------------------------------------------------------------------
</Table>
This resulted in approval of the proposal.
www.mainstayfunds.com 29
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Pursuant to
notice, a Special Meeting of Shareholders of the Trust was held on May 4, 2007,
at NYLIM's offices in Parsippany, New Jersey. The Trustees listed below were
elected to serve the Trust effective June 7, 2007.
Each Trustee serves until his or her successor is elected and qualified or until
his or her resignation, death or removal. The Retirement Policy provides that a
Trustee shall tender his or her resignation upon reaching age 72. A Trustee
reaching the age of 72 may continue for additional one-year periods with the
approval of the Board's Nominating and Governance Committee, except that no
Trustee shall serve on the Board past his or her 75th birthday. Officers serve a
term of one year and are elected annually by the Trustees. The business address
of each Trustee and officer listed below is 51 Madison Avenue, New York, New
York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF FUNDS
POSITION(S) HELD IN FUND COMPLEX
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
BRIAN A. MURDOCK Indefinite; Member of the Board of Managers 73 Trustee, Eclipse Funds since
3/14/56 Trustee and Chief and President (since 2004) and June, 2007 (3 funds); Director,
Executive Officer Chief Executive Officer (since Eclipse Funds Inc. since June
since 2006 2006), New York Life Investment 2007 (22 funds); Director,
Management LLC and New York MainStay VP Series Fund, Inc.,
Life Investment Management since 2006 (24 portfolios);
Holdings LLC; Senior Vice Director, ICAP Funds, Inc.,
President, New York Life since 2006 (3 funds)
Insurance Company (since 2004);
Chairman of the Board and
President, NYLIFE Distributors
LLC (since 2004); Member of the
Board of Managers, NYLCAP
Manager LLC and Madison Capital
Funding LLC (since 2004),
MacKay Shields LLC and
Institutional Capital LLC
(since 2006), and McMorgan &
Company LLC (since 2007); Chief
Executive Officer, Eclipse
Funds and Eclipse Funds Inc.
(since 2006); Chairman (2006 to
2007) and Director and Chief
Executive Officer (since 2006),
MainStay VP Series Fund, Inc.;
Director and Chief Executive
Officer, ICAP Funds, Inc.
(since 2006); Chief Investment
Officer, MLIM Europe and Asia
(2001 to 2003); President of
Merrill Japan and Chairman of
MLIM's Pacific Region (1999 to
2001)
-----------------------------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow Capital
Management, Inc., McMorgan & Company LLC, NYLIFE Securities Inc. and/or NYLIFE
Distributors LLC, as described in detail above in the column "Principal
Occupation(s) During Past Five Years."
30 MainStay Convertible Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. KERLEY Indefinite; Partner, Strategic Management 73 Chairman since 2005 and Trustee
8/12/51 Chairman and Advisors LLC (since 1990) since 2000, Eclipse Funds (3
Trustee since funds); Chairman since 2005 and
June 2007 Director since 1990, Eclipse
Funds Inc. (22 funds); Chairman
and Director, ICAP Funds, Inc.,
since 2006 (3 funds); Chairman
and Director, MainStay VP
Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
Legg Mason Partners Funds,
Inc., since 1991 (30
portfolios)
----------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & Young 73 Trustee, Eclipse Funds since
3/27/51 Trustee and Audit LLP (2002 to 2003); Partner, June 2007 (3 funds); Director,
Committee Arthur Andersen LLP (1989 to Eclipse Funds Inc. since June
Financial Expert 2002); Consultant to the Audit 2007 (22 funds); Director, ICAP
since 2006 and Compliance Committee of The Funds, Inc., since June 2007 (3
MainStay Funds (2004 funds); Director, MainStay VP
to 2006) Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
State Farm Associates Funds
Trusts since 2005 (3
portfolios); Trustee, State
Farm Mutual Fund Trust since
2005 (15 portfolios); Trustee,
State Farm Variable Product
Trust since 2005 (9 portfolios)
----------------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds since
12/5/41 Trustee since President and Chief Executive 2002 (3 funds); Director,
June 2007 Officer, Babson-United, Inc. Eclipse Funds Inc. since 2002
(financial services firm) (2000 (22 funds); Director, ICAP
to 2004); Independent Funds, Inc.,
Consultant (1999 to 2000); Head since 2006 (3 funds); Director,
of Global Funds, Citicorp (1995 MainStay VP Series Fund, Inc.,
to 1999) since June 2007 (24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 73 Trustee, Eclipse Funds since
NOLAN, JR. Trustee since Management; President--Shields/ June 2007 (3 funds); Director,
11/16/46 June 2007 Alliance, Alliance Capital Eclipse Funds Inc. since June
Management (1994 to 2004) 2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 2006
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman (since 1990) and Chief 73 Trustee, Eclipse Funds since
TRUTANIC Trustee since Executive Officer (1990 to June 2007 (3 funds); Director,
2/13/52 1994 1999), Somerset Group Eclipse Funds Inc. since June
(financial advisory firm); 2007 (22 funds); Director, ICAP
Managing Director and Advisor, Funds, Inc., since June 2007 (3
The Carlyle Group (private funds); Director, MainStay VP
investment firm) (2002 to Series Fund, Inc., since June
2004); Senior Managing Director 2007 (24 portfolios)
and Partner, Groupe Arnault
S.A. (private investment firm)
(1999
to 2002)
----------------------------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 31
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEE
ROMAN L. WEIL Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds since
5/22/40 Trustee and Audit Accounting, Graduate School of June 2007 (3 funds); Director,
Committee Business, University of Eclipse Funds Inc. since June
Financial Expert Chicago; President, Roman L. 2007 (22 funds); Director, ICAP
since June 2007 Weil Associates, Inc. Funds, Inc., since June 2007 (3
(consulting firm) funds); Director, MainStay VP
Series Fund, Inc., since 1994
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 73 Trustee, Eclipse Funds since
10/22/41 Trustee since Salomon Brothers, Inc. (1971 to June 2007 (3 funds); Director,
June 2007 1995) Eclipse Funds Inc. since June
2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 1997
(24 portfolios); Trustee,
Direxion Funds (69 funds) and
Direxion Insurance Trust (45
funds) since March 2007
----------------------------------------------------------------------------------------------------------------------
</Table>
Terry L. Lierman resigned as Trustee of the Trust effective May 31, 2007. Edward
J. Hogan, John B. McGuckian and Donald E. Nickelson resigned as Trustees of the
Trust effective June 7, 2007.
At a meeting of the Board of Trustees held on June 7 and 8, 2007, the following
individuals were appointed to serve as Officers of the Trust effective June 7,
2007:
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ROBERT A. Chief Legal Senior Managing Director, General Counsel and Secretary, New
ANSELMI Officer since York Life Investment Management LLC (including predecessor
10/19/46 2004 advisory organizations) (since 2000); Secretary (since 2001)
and General Counsel (since 2004), New York Life Investment
Management Holdings LLC; Senior Vice President, New York
Life Insurance Company (since 2000); Vice President and
Secretary, McMorgan & Company LLC (since 2001); Secretary,
NYLIM Service Company LLC (since 2005), NYLCAP Manager LLC
(since 2004), Madison Capital Funding LLC (since 2002), and
Institutional Capital LLC (since 2006); Chief Legal Officer,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), McMorgan Funds (since 2005) and
ICAP Funds, Inc. (since 2006); Managing Director and Senior
Counsel, Lehman Brothers Inc. (1998 to 1999); General
Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998)
-------------------------------------------------------------------------------------------------
JACK R. Treasurer and Managing Director, New York Life Investment Management LLC
BENINTENDE Principal (since June 2007); Treasurer and Principal Financial and
5/12/64 Financial and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
Accounting MainStay VP Series Fund, Inc., and ICAP Funds, Inc. (since
Officer since June 2007); Vice President, Prudential Investments (2000 to
June 2007 2007); Assistant Treasurer, JennisonDryden Family of Funds,
Target Portfolio Trust, The Prudential Series Fund and
American Skandia Trust (2006 to 2007); Treasurer and
Principal Financial Officer, The Greater China
Fund (2007)
-------------------------------------------------------------------------------------------------
STEPHEN P. President since Senior Managing Director and Chief Marketing Officer, New
FISHER March 2007 York Life Investment Management LLC (since 2005); Managing
2/22/59 Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since March 2007); Managing Director, UBS
Global Asset Management (1999 to 2003)
-------------------------------------------------------------------------------------------------
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration predecessor advisory organizations) (since 2000); Executive
2/8/59 since 2005 Vice President, New York Life Trust Company (since 2006);
Vice President--Administration, Eclipse Funds, Eclipse Funds
Inc. and MainStay VP Series Fund, Inc. (since 2005) and ICAP
Funds, Inc. (since 2006)
-------------------------------------------------------------------------------------------------
</Table>
32 MainStay Convertible Fund
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Senior Managing Director and Chief Compliance Officer (since
MICUCCI President and 2006) and Managing Director and Chief Compliance Officer
12/16/65 Chief Compliance (2003 to 2006), New York Life Investment Management LLC and
Officer since New York Life Investment Management Holdings LLC; Senior
2006 Managing Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE Distributors
LLC; Chief Compliance Officer, NYLCAP Manager LLC (since
2006); Senior Vice President and Chief Compliance Officer,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund,
Inc., and ICAP Funds, Inc. (since 2006); Vice President--
Compliance, Eclipse Funds, Eclipse Funds Inc. and MainStay
VP Series Fund, Inc. (2004 to 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002)
-------------------------------------------------------------------------------------------------
MARGUERITE E.H. Secretary since Managing Director and Associate General Counsel, New York
MORRISON* 2004 Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC (since
2005); Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP Funds,
Inc. (since 2006); Chief Legal Officer--Mutual Funds and
Vice President and Corporate Counsel, The Prudential
Insurance Company of America (2000 to 2004)
-------------------------------------------------------------------------------------------------
</Table>
* In addition to serving as Secretary to the Trust, effective January 1, 2008,
Marguerite E.H. Morrison will assume the role of Chief Legal Officer to the
Trust.
Arphiela Arizmendi resigned as Treasurer and Principal Financial and Accounting
Officer of the Trust effective June 7, 2007.
Christopher O. Blunt resigned as President of the Trust effective March 12,
2007.
Alan J. Kirshenbaum resigned as Senior Vice President of the Trust effective
March 19, 2007.
www.mainstayfunds.com 33
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay 130/30 Core Fund
MainStay 130/30 Growth Fund
MainStay All Cap Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay 130/30 High Yield Fund(2)
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Institutional Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Principal Preservation Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay 130/30 International Fund
MainStay Global High Income Fund
MainStay ICAP International Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
RETIREMENT FUNDS
MainStay Retirement 2010 Fund
MainStay Retirement 2020 Fund
MainStay Retirement 2030 Fund
MainStay Retirement 2040 Fund
MainStay Retirement 2050 Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
New York, New York
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
Chicago, Illinois
MACKAY SHIELDS LLC(3)
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
MCMORGAN & COMPANY LLC(3)
San Francisco, California
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
(NEW YORK LIFE INVESTMENT MANAGEMENT LLC LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2007 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A011872 (RECYCLE LOGO) MS329-07 MSC11-12/07
05
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
DIVERSIFIED INCOME FUND
Message from the President
and
Annual Report
October 31, 2007
MESSAGE FROM
THE PRESIDENT
The 12-month period ended October 31, 2007, was a dynamic one for mutual fund
investors. U.S. equity markets generally advanced, with growth stocks out-
performing value stocks at all capitalization levels. Although past performance
is no guarantee of future results, international stocks as a whole provided even
stronger returns for U.S. investors.
The progress of the equity markets, however, was far from steady. In February,
weakness in Asian markets led to sharp price declines around the globe. The
correction caused many investors to reconsider whether China and other emerging
economies could sustain their rapid growth. Fortunately, strong
corporate-earnings reports and positive economic news helped the stock market
regain its footing.
In July and August, difficulties in the subprime-mortgage market led to another
stock-market correction. A number of high-profile mortgage originators either
closed their doors or were sold to larger entities. Other leading financial
services firms faced major write-offs because of subprime-mortgage exposure.
The Federal Open Market Committee (FOMC) took prompt action to increase
liquidity and stabilize the financial markets by lowering the discount rate and
the federal funds target rate during the reporting period. These Federal Reserve
moves helped calm investor concerns, and the stock market generally advanced
from August 16, 2007, the date of an unscheduled FOMC meeting, through the end
of October 2007.
Difficulties in the subprime-mortgage market led to a "flight to quality," or a
general movement toward fixed-income securities that carry lower risk. As demand
for short- and intermediate-term Treasury securities increased, yields fell
across much of the maturity spectrum. Yields rose, however, on 20-and 30-year
Treasury bonds, and the yield curve steepened during the 12-month reporting
period.
High-yield bonds rallied from November 2006 through May 2007. But in June and
July, the yield differences--or spreads--between high-yield bonds and comparable
Treasury securities began to widen. At the end of October 2007, these spreads
were wider than when the reporting period began, making high-yield securities
more attractive to investors willing to accept higher risk.
To help investors address the challenges of today's ever-changing markets, New
York Life Investment Management LLC provides access to seven institutional
investment boutiques, each with its own proprietary research and investment
culture. As advisors and subadvisors to MainStay Funds, these boutiques bring a
wealth of experience and market insight to our shareholders. The portfolio
managers of each MainStay Fund seek to consistently apply time-tested investment
principles across a wide variety of market environments.
The report that follows provides more specific information about the market
forces and investment decisions that affected your investment in MainStay Funds
from November 1, 2006, through October 31, 2007. Please read the report
carefully. As you do, bear in mind that this annual report reflects just a short
segment of your lifetime investment journey. We look forward to continuing to
work with you, wherever that journey may lead.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
DIVERSIFIED INCOME FUND
MainStay Funds
Annual Report
October 31, 2007
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 26
- --------------------------------------------------------------------------------
Notes to Financial Statements 32
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 41
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 42
- --------------------------------------------------------------------------------
Federal Income Tax Information 44
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 44
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 44
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 44
- --------------------------------------------------------------------------------
Trustees and Officers 45
</Table>
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT
MONTH-END PERFORMANCE INFORMATION, PLEASE CALL 1-800-MAINSTAY (1-800-624-6782)
OR VISIT WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES--MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 2.32% 8.35% 5.18%
Excluding sales charges 7.14 9.35 5.67
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY DIVERSIFIED LEHMAN BROTHERS
INCOME FUND AGGREGATE BOND INDEX THREE-INDEX COMPOSITE
-------------------- -------------------- ---------------------
10/31/97 9550.00 10000.00 10000.00
9777.00 10934.00 10655.00
10145.00 10992.00 10770.00
10135.00 11794.00 10641.00
10664.00 13512.00 11420.00
10600.00 14307.00 12036.00
13098.00 15009.00 14166.00
14203.00 15839.00 15618.00
14503.00 16018.00 15742.00
15470.00 16849.00 16834.00
10/31/07 16574.00 17757.00 18158.00
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 1.23% 8.25% 4.88%
Excluding sales charges 6.23 8.54 4.88
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY DIVERSIFIED LEHMAN BROTHERS
INCOME FUND AGGREGATE BOND INDEX THREE-INDEX COMPOSITE
-------------------- -------------------- ---------------------
10/31/97 10000.00 10000.00 10000.00
10158.00 10934.00 10655.00
10478.00 10992.00 10770.00
10373.00 11794.00 10641.00
10847.00 13512.00 11420.00
10691.00 14307.00 12036.00
13121.00 15009.00 14166.00
14128.00 15839.00 15618.00
14302.00 16018.00 15742.00
15161.00 16849.00 16834.00
10/31/07 16106.00 17757.00 18158.00
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 5.23% 8.54% 4.88%
Excluding sales charges 6.23 8.54 4.88
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY DIVERSIFIED LEHMAN BROTHERS
INCOME FUND AGGREGATE BOND INDEX THREE-INDEX COMPOSITE
-------------------- -------------------- ---------------------
10/31/97 10000.00 10000.00 10000.00
10158.00 10934.00 10655.00
10478.00 10992.00 10770.00
10373.00 11794.00 10641.00
10847.00 13512.00 11420.00
10691.00 14307.00 12036.00
13121.00 15009.00 14166.00
14128.00 15839.00 15618.00
14302.00 16018.00 15742.00
15161.00 16849.00 16834.00
10/31/07 16106.00 17757.00 18158.00
</Table>
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect maximum applicable sales charges explained in this paragraph, change in
share price, and reinvestment of dividend and capital-gain distributions. The
graphs assume an initial investment of $10,000 and reflect the deduction of all
sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 4.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase and have an annual 12b-1 fee of 1.00%.
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee and are generally available to corporate and institutional investors
with a minimum initial investment of $5 million. Performance figures reflect
certain fee waivers and/or expense limitations, without which total returns may
have been lower. These fee waivers and/or expense limitations are contractual
and may be modified or terminated only with the approval of the Board of
Trustees. The Manager may recoup the amount of certain management fee waivers or
expense reimbursements from the Fund pursuant to the contract if such action
does not cause the Fund to exceed existing expense limitations and the
recoupment is made within three years after the year in which the Manager
incurred the expense. From inception (2/28/97) through 8/31/98, performance for
Class C shares (first offered 9/1/98), includes the historical performance of
Class B shares adjusted to reflect the applicable CDSC, fees, estimated expenses
and fee waivers/expense limita-
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
7.50% 9.69% 5.96%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY DIVERSIFIED LEHMAN BROTHERS
INCOME FUND AGGREGATE BOND INDEX THREE-INDEX COMPOSITE
-------------------- -------------------- ---------------------
10/31/97 10000.00 10000.00 10000.00
10263.00 10934.00 10655.00
10677.00 10992.00 10770.00
10694.00 11794.00 10641.00
11282.00 13512.00 11420.00
11243.00 14307.00 12036.00
13925.00 15009.00 14166.00
15153.00 15839.00 15618.00
15505.00 16018.00 15742.00
16604.00 16849.00 16834.00
10/31/07 17849.00 17757.00 18158.00
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- ------------------------------------------------------------------------------
Lehman Brothers(R) Aggregate Bond Index(1) 5.38% 4.41% 5.91%
Three-Index Composite(2) 7.86 8.57 6.15
Average Lipper multi-sector income fund(3) 6.49 9.09 5.54
</Table>
tions of Class C shares upon initial offer. From inception (2/28/97) through
12/31/03, performance for Class I shares (first offered 1/2/04) includes the
historical performance of Class A shares adjusted to reflect the applicable
fees, estimated expenses and fee waivers/expense limitations of Class I shares
upon initial offer. Unadjusted, the performance shown for those newer classes of
shares might have been lower.
1. The Lehman Brothers(R) Aggregate Bond Index is an unmanaged index that
consists of the following other unmanaged Lehman Brothers(R) Indices: the
Government Index, Corporate Index, Mortgage-Backed Securities Index and
Asset-Backed Securities Index. To qualify for inclusion in the Lehman
Brothers(R) Aggregate Bond Index, securities must be U.S. dollar denominated
and investment grade and have a fixed-rate coupon, a remaining maturity of at
least one year, and a par amount outstanding of at least $250 million.
Results assume reinvestment of all income and capital gains. An investment
cannot be made directly in an index. The Lehman Brothers(R) Aggregate Bond
Index is considered to be the Fund's broad-based securities-market index for
comparison purposes.
2. The Fund's Three-Index Composite assumes equal investments in the Lehman
Brothers(R) Aggregate Bond Index, the Credit Suisse High Yield Index, and the
Citigroup Non-U.S. Dollar World Government Bond Index. All indices are
unmanaged. The indices measure the performance of securities in the U.S.
government and domestic investment-grade bond sector, the U.S. high-yield
bond sector and the international bond sector, respectively. Results assume
that all income and capital gains are reinvested in the index or indices that
produce them. An investment cannot be made directly in an index or this
composite.
3. Lipper Inc. is an independent monitor of fund performance. Results are based
on total returns with all dividend and capital-gain distributions reinvested.
THE DISCLOSURE ON THE PRECEDING PAGE IS AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Diversified Income Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY DIVERSIFIED INCOME FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2007, to October 31, 2007,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1,
2007, to October 31, 2007.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six-months ended October 31, 2007. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/07 10/31/07 PERIOD(1) 10/31/07 PERIOD(1)
CLASS A SHARES $1,000.00 $1,022.10 $ 6.63 $1,018.50 $ 6.61
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,018.35 $10.43 $1,014.75 $10.41
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,018.35 $10.43 $1,014.75 $10.41
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,023.70 $ 4.90 $1,020.20 $ 4.89
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's net annualized expense ratio of each class
(1.30% for Class A, 2.05% for Class B and Class C, and 0.96% for Class I)
multiplied by the average account value over the period, divided by 365 and
multiplied by 184 (to reflect the one-half year period).
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2007
(COMPOSITION PIE CHART)
<Table>
Foreign Government Bonds 24.90
Corporate Bonds 24.50
Corporate Bonds--Foreign 18.50
U.S. Government & Federal Agencies 16.60
Short-Term Investments (collateral from securities lending 8.00
is 6.5%)
Convertible Bonds 2.70
Mortgage-Backed Securities 2.40
Loan Assignments & Participations 2.40
Convertible Preferred Stocks 1.40
Asset-Backed Securities 1.00
Common Stocks 0.90
Preferred Stocks 0.40
Municipal Bonds 0.40
Yankee Bonds 0.40
Medium-Term Note 0.20
Purchased Call Option 0.10
Purchased Put Option 0.00*
Warrants 0.00*
Liabilities in Excess of Cash and Other Assets (4.80)
</Table>
* Less than one-tenth of a percent.
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2007 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Federal National Mortgage Association, 4.875%,
due 5/18/12
2. Federal National Mortgage Association, 6.25%,
due 2/1/11
3. Federal National Mortgage Association, 5.375%,
due 6/12/17
4. Hellenic Republic, 4.50%, due 5/20/14
5. Federal Republic of Brazil, 8.25%, due 1/20/34
6. Federal Republic of Brazil, 12.50%, due 1/5/22
7. United Mexican States, 6.75%, due 9/27/34
8. Overseas Private Investment Corporation, 5.142%,
due 12/15/23
9. Federal National Mortgage Association, 6.625%,
due 9/15/09
10. Republic of Germany, 5.00%, due 7/4/11
</Table>
8 MainStay Diversified Income Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Joseph Portera and J. Matthew Philo,
CFA, of MacKay Shields LLC
HOW DID MAINSTAY DIVERSIFIED INCOME FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2007?
Excluding all sales charges, MainStay Diversified Income Fund returned 7.14% for
Class A shares, 6.23% for Class B shares and 6.23% for Class C shares for the 12
months ended October 31, 2007. Over the same period, the Fund's Class I shares
returned 7.50%. Class A and Class I shares outperformed--and Class B and Class C
shares underperformed--the 6.49% return of the average Lipper(1) multi-sector
income fund for the 12-month reporting period. All share classes outperformed
the 5.38% return of the Lehman Brothers(R) Aggregate Bond Index(2) and
underperformed the 7.86% return of the Fund's Three-Index Composite(3) for the
12 months ended October 31, 2007. The Lehman Brothers(R) Aggregate Bond Index is
the Fund's broad-based securities-market index. See page 5 for Fund returns with
sales charges.
WHAT KEY FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING
PERIOD?
Timely asset allocation drove the Fund's relative performance during the
reporting period. Our decision to gradually increase the Fund's position in
emerging-market debt had a positive impact, as emerging-market debt rallied
early in the period and outperformed other fixed-income sectors during the
summer sell-off, when the fallout from nonperforming subprime-mortgage loans
began to roil the broader bond market. In emerging debt markets, we added
securities denominated in local currencies. The move helped results, because
local currency emerging-market bonds generally fared better than
developed-market debt during the reporting period.
We took advantage of the run-up in stock prices early in the first half of the
reporting period, and we sold the Fund's convertible bond holdings at a profit
before the stock market sell-off. After the downturn, we resumed making
convertible-bond purchases.
Our decision to avoid subprime-mortgage debt was also fortuitous in light of
credit difficulties that unfolded during the reporting period. Indeed, the Fund
was not directly involved in the shakeout in residential lending. During the
reporting period, several high-profile subprime-mortgage-loan originators either
closed because of capital constraints or were sold to larger entities. Lax
underwriting standards in 2006 were largely responsible for unprecedented
delinquencies in 2007.
Our decision to hedge the Fund's G7 currency exposure led to mixed results.(4)
During the subprime-mortgage crisis, the U.S. bond market experienced a "flight
to quality," or general a movement toward lower-risk fixed-income securities.
This trend, along with monetary easing by the Federal Open Market Committee,
supported a strong G7 government-bond rally toward the end of the reporting
period.
HOW DID YOU ALLOCATE THE FUND'S HOLDINGS WITHIN THE HIGH-YIELD MARKET?
In the high-yield market, our bottom-up investment process remained consistent.
We built a diversified portfolio of credits that presented a required margin of
safety against default and a catalyst for credit improvement over time.
Throughout the reporting period, we found credit risk to be mispriced in
general. In our opinion, the market was not presenting sufficient compensation,
on average, for assuming additional risk within the asset class. As a result,
the Fund was underweight in the lowest-rated high-yield credits throughout the
reporting period. Maintaining a cautious approach to the high-yield market
helped the Fund's performance overall, as high-yield portion of the Fund
outperformed the high-yield market toward the end of the reporting period.
Funds that invest in bonds are subject to credit, inflation and interest-rate
risk and can lose principal value when interest rates rise. Foreign securities
may be subject to greater risks than U.S. investments, including currency
fluctuations, less-liquid trading markets, greater price volatility, political
and economic instability, less publicly available information, and changes in
tax or currency laws or monetary policy. These risks are likely to be greater in
emerging markets than in developed markets. High-yield debt securities ("junk
bonds") are generally considered speculative because they present a greater risk
of loss than higher-quality debt securities and may be subject to greater price
volatility. The Fund may invest in derivatives, which may increase the
volatility of the Fund's net asset value and may result in a loss to the Fund.
The Fund may experience a portfolio turnover of more than 100% and may generate
taxable short-term capital gains.
1. See footnote on page 6 for more information on Lipper Inc.
2. See footnote on page 6 for more information on the Lehman Brothers(R)
Aggregate Bond Index.
3. See footnote on page 6 for more information on the Fund's Three-Index
Composite.
4. The Group of Seven (G7) is a forum of seven leading economic powers--Canada,
France, Germany, Italy, Japan, the United Kingdom and the United States--that
meets to ensure the stability of the international financial system. Russia
joined the group in 1998, creating the G8, but financial issues continue to
be addressed by the G7.
www.mainstayfunds.com 9
HOW DID YOU MANAGE THE FUND'S POSITION IN EMERGING-MARKET DEBT DURING THE
REPORTING PERIOD?
We used a combination of top-down and bottom-up credit analysis for asset
allocation and security selection in the emerging markets. We continued to see
good fundamental and technical support for the asset class and increased the
Fund's weighting in emerging-market debt. Specifically, we found value in local
currency sovereign and corporate debt as well as in U.S. dollar denominated
debt. We reduced the Fund's exposure to corporate and sovereign investment-grade
debt to fund these emerging-market debt purchases. The Fund's increased
allocation to emerging-market debt contributed significantly to the Fund's yield
and, as mentioned earlier, was an important driver of its relative performance
during the reporting period.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
We added to or established meaningful positions during the reporting period in
the bonds of Community Health Systems, Reliant Energy and TXU Energy. We reduced
or eliminated significant positions in fixed-income securities of Chiquita
Brands International, GMAC LLC and Jean Coutu Group.
DID YOU MAKE ANY SIGNIFICANT WEIGHTING CHANGES DURING THE REPORTING PERIOD?
During the reporting period, we significantly increased the Fund's weighting in
emerging-market debt and reduced the Fund's exposure to developed-market
government debt. The Fund's weighting in high-yield debt remained relatively
steady, and we successfully navigated the convertible-bond sector, by selling
before the market traded lower.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
In the high-yield segment of the market, the Fund was overweight in the health
care and energy sectors and underweight in consumer discretionary, especially
home builders and retail. In the investment-grade segment, the Fund was
underweight in mortgage-backed securities. Toward the end of the reporting
period, we reduced the Fund's position in U.S. Treasury securities to sharply
underweight. In the non-dollar and emerging-market debt segments, we favored
corporate debt over government debt.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecast made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
10 MainStay Diversified Income Fund
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2007
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (94.0%)+
ASSET-BACKED SECURITIES (1.0%)
- ----------------------------------------------------------------------------------
AUTOMOBILE (0.0%)++
Superior Wholesale Inventory Financing Trust
Series 2007-AE1, Class A
5.191%, due 1/15/12 (a) $ 50,000 $ 49,519
------------
CONSUMER FINANCE (0.2%)
Harley-Davidson Motorcycle Trust
Series 2004-1, Class A2
2.53%, due 11/15/11 218,452 214,597
------------
CONSUMER LOANS (0.1%)
Atlantic City Electric Transition Funding LLC
Series 2002-1, Class A4
5.55%, due 10/20/23 75,000 74,022
------------
CREDIT CARDS (0.1%)
Citibank Credit Card Issuance Trust
Series 2006-C4, Class C4
5.345%, due 1/9/12 (a) 140,000 136,991
------------
DIVERSIFIED FINANCIAL SERVICES (0.3%)
Bank of America Credit Card Trust
Series 2006-C4, Class C4
5.321%, due 11/15/11 (a) 130,000 127,984
Dunkin Securitization
Series 2006-1, Class A2
5.779%, due 6/20/31 (b) 110,000 110,854
USXL Funding LLC
Series 2006-1A, Class A
5.379%, due 4/15/14 (b) 67,761 67,837
------------
306,675
------------
ENTERTAINMENT (0.1%)
United Artists Theatre Circuit, Inc.
Series 1995-A
9.30%, due 7/1/15 (c)(d) 80,528 72,475
------------
HOME EQUITY (0.2%)
Citicorp Residential Mortgage Securities, Inc.
Series 2006-3, Class A3
5.61%, due 11/25/36 (e) 100,000 97,896
Series 2006-1, Class A3
5.706%, due 7/25/36 (e) 120,000 118,081
------------
215,977
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
HOME EQUITY (CONTINUED)
Citicorp Residential Mortgage
Securities, Inc. (continued)
Total Asset-Backed Securities
(Cost $1,076,075) $ 1,070,256
------------
CONVERTIBLE BONDS (2.7%)
- ----------------------------------------------------------------------------------
AIRLINES (0.2%)
AMR Corp.
4.50%, due 2/15/24 $ 155,000 196,656
------------
FOOD (0.2%)
Spartan Stores, Inc.
3.375%, due 5/15/27 (b) 257,000 237,725
------------
HEALTH CARE--PRODUCTS (0.5%)
Medtronic, Inc.
1.625%, due 4/15/13 541,000 557,906
------------
HOUSEHOLD PRODUCTS & WARES (0.3%)
Church & Dwight Co., Inc.
5.25%, due 8/15/33 208,000 324,220
------------
INSURANCE (0.0%)++
Conseco, Inc.
3.50%, due 9/30/35
(zero coupon), beginning 9/30/10 35,000 32,288
------------
INTERNET (0.0%)++
At Home Corp.
4.75%, due 12/15/07 (c)(d)(f)(n) 504,238 50
------------
OIL & GAS (0.4%)
Pride International, Inc.
3.25%, due 5/1/33 303,000 446,168
------------
OIL & GAS SERVICES (0.6%)
Halliburton Co.
3.125%, due 7/15/23 298,000 627,663
------------
PHARMACEUTICALS (0.4%)
Wyeth
4.886%, due 1/15/24 (a)(g) 430,000 461,072
------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE BONDS (CONTINUED)
- ----------------------------------------------------------------------------------
TELECOMMUNICATIONS (0.1%)
Nortel Networks Corp.
4.25%, due 9/1/08 $ 84,000 $ 82,950
------------
Total Convertible Bonds
(Cost $2,932,740) 2,966,698
------------
CORPORATE BONDS (24.5%)
- ----------------------------------------------------------------------------------
ADVERTISING (0.3%)
Lamar Media Corp.
6.625%, due 8/15/15 120,000 115,200
R.H. Donnelley, Inc.
8.875%, due 10/15/17 (b) 125,000 125,000
Vertis, Inc.
9.75%, due 4/1/09 75,000 75,000
------------
315,200
------------
AEROSPACE & DEFENSE (0.2%)
Sequa Corp.
8.875%, due 4/1/08 207,000 209,329
------------
AGRICULTURE (0.2%)
Reynolds American, Inc.
7.625%, due 6/1/16 100,000 108,192
7.75%, due 6/1/18 80,000 86,796
------------
194,988
------------
AIRLINES (0.1%)
Delta Air Lines, Inc.
2.875%, due 2/6/24 (f) 55,000 3,575
2.875%, due 2/18/24 (b)(f) 30,000 1,950
8.00%, due 6/3/23 (f) 81,000 5,370
8.30%, due 12/15/29 (f) 505,000 33,456
9.75%, due 5/15/21 (f) 5,000 331
10.00%, due 8/15/08 (f) 35,000 2,231
10.375%, due 12/15/22 (f) 10,000 638
Northwest Airlines, Inc.
7.625%, due 11/15/23 (f) 117,700 5,744
7.875%, due 3/15/08 (f) 25,000 1,063
8.70%, due 3/15/08 (f) 5,000 213
8.875%, due 6/1/08 (f) 30,000 1,313
9.875%, due 3/15/08 (f) 65,000 2,925
10.00%, due 2/1/09 (f) 168,300 7,153
------------
65,962
------------
APPAREL (0.1%)
Unifi, Inc.
11.50%, due 5/15/14 95,000 89,538
------------
AUTO PARTS & EQUIPMENT (0.7%)
American Tire Distributors, Inc.
11.481%, due 4/1/12 (a) 65,000 65,650
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
AUTO PARTS & EQUIPMENT (CONTINUED)
FleetPride Corp.
11.50%, due 10/1/14 (b) $ 235,000 $ 235,000
Goodyear Tire & Rubber Co. (The)
11.25%, due 3/1/11 360,000 385,200
Lear Corp.
Series B
8.50%, due 12/1/13 65,000 63,294
8.75%, due 12/1/16 45,000 43,200
Tenneco Automotive, Inc.
8.625%, due 11/15/14 (g) 20,000 20,400
------------
812,744
------------
BANKS (0.2%)
USB Capital IX
6.189%, due 4/15/11 (a) 135,000 136,108
Wachovia Corp.
5.50%, due 8/1/35 110,000 100,529
------------
236,637
------------
BEVERAGES (0.1%)
Constellation Brands, Inc.
7.25%, due 5/15/17 (b) 95,000 94,763
------------
BUILDING MATERIALS (0.3%)
Compression Polymers Corp.
10.50%, due 7/1/13 55,000 55,000
Dayton Superior Corp.
10.75%, due 9/15/08 120,000 121,500
Panolam Industries International, Inc.
10.75%, due 10/1/13 (b) 160,000 152,000
USG Corp.
6.30%, due 11/15/16 50,000 45,746
------------
374,246
------------
CHEMICALS (0.4%)
Equistar Chemicals, L.P.
10.625%, due 5/1/11 157,000 164,065
Millennium America, Inc.
7.625%, due 11/15/26 149,000 128,140
Mosaic Global Holdings, Inc.
7.625%, due 12/1/16 (b) 40,000 43,100
Tronox Worldwide LLC/Tronox Finance Corp.
9.50%, due 12/1/12 110,000 106,150
------------
441,455
------------
COAL (0.1%)
Peabody Energy Corp.
7.375%, due 11/1/16 95,000 98,800
7.875%, due 11/1/26 60,000 62,700
------------
161,500
------------
</Table>
12 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ----------------------------------------------------------------------------------
COMMERCIAL SERVICES (0.8%)
Cardtronics, Inc.
9.25%, due 8/15/13 $ 100,000 $ 96,500
9.25%, due 8/15/13 (b) 65,000 62,725
Great Lakes Dredge & Dock Corp.
7.75%, due 12/15/13 100,000 97,000
iPayment, Inc.
9.75%, due 5/15/14 180,000 172,800
Language Line, Inc.
11.125%, due 6/15/12 125,000 130,000
Phoenix Color Corp.
13.00%, due 2/1/09 91,000 90,090
Protection One Alarm Monitoring, Inc.
Series B
8.125%, due 1/15/09 65,000 66,625
Service Corp. International
7.375%, due 10/1/14 90,000 92,025
7.625%, due 10/1/18 90,000 92,250
------------
900,015
------------
COMPUTERS (0.3%)
SunGard Data Systems, Inc.
3.75%, due 1/15/09 145,000 141,375
4.875%, due 1/15/14 40,000 35,300
9.125%, due 8/15/13 130,000 132,600
------------
309,275
------------
DISTRIBUTION & WHOLESALE (0.1%)
Varietal Distribution Merger Sub, Inc.
10.25%, due 7/15/15 (b)(g)(h) 155,000 151,900
------------
DIVERSIFIED FINANCIAL SERVICES (3.1%)
American Real Estate Partners, L.P./ American Real
Estate Finance Corp.
8.125%, due 6/1/12 530,000 533,975
AmeriCredit Corp.
8.50%, due 7/1/15 (b) 145,000 129,775
Bear Stearns Cos., Inc. (The)
5.55%, due 1/22/17 360,000 336,569
Chukchansi Economic Development Authority
8.00%, due 11/15/13 (b) 45,000 45,338
Ford Motor Credit Co. LLC
7.375%, due 10/28/09 105,000 101,268
7.875%, due 6/15/10 5,000 4,820
General Motors Acceptance Corp. LLC
6.625%, due 5/15/12 100,000 89,773
8.00%, due 11/1/31 720,000 665,509
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
DIVERSIFIED FINANCIAL SERVICES (CONTINUED)
Hawker Beechcraft Acquisition Co. LLC/Hawker
Beechcraft Co.
8.50%, due 4/1/15 (b) $ 65,000 $ 66,138
9.75%, due 4/1/17 (b)(g) 25,000 25,438
Idearc, Inc.
8.00%, due 11/15/16 265,000 265,663
LaBranche & Co., Inc.
9.50%, due 5/15/09 100,000 101,500
11.00%, due 5/15/12 175,000 173,250
OMX Timber Finance Investments LLC
Series 1
5.42%, due 1/29/20 (b) 100,000 98,444
Rainbow National Services LLC
8.75%, due 9/1/12 (b) 90,000 93,600
10.375%, due 9/1/14 (b) 170,000 187,000
Regency Energy Partners/Regency Energy Finance
Corp.
8.375%, due 12/15/13 85,000 89,463
Residential Capital Corp.
6.50%, due 4/17/13 95,000 69,350
Ucar Finance, Inc.
10.25%, due 2/15/12 85,000 88,825
Vanguard Health Holding Co. II LLC
9.00%, due 10/1/14 165,000 160,875
------------
3,326,573
------------
ELECTRIC (1.0%)
AES Eastern Energy, L.P.
Series 1999-A
9.00%, due 1/2/17 313,643 339,519
Calpine Corp.
8.50%, due 7/15/10 (b) 361,000 386,270
9.875%, due 12/1/11 (b) 29,000 30,305
Consumers Energy Co.
Series F
4.00%, due 5/15/10 340,000 331,944
Energy Future Holdings
10.875%, due 11/1/17 (b) 110,000 111,238
NRG Energy, Inc.
7.25%, due 2/1/14 70,000 70,000
7.375%, due 2/1/16 120,000 119,700
PSE&G Energy Holdings LLC
8.625%, due 2/15/08 5,000 5,030
Reliant Energy Mid-Atlantic Power Holdings LLC
Series C
9.681%, due 7/2/26 145,000 167,475
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ----------------------------------------------------------------------------------
ELECTRIC (CONTINUED)
Reliant Energy, Inc.
7.625%, due 6/15/14 $ 25,000 $ 25,219
7.875%, due 6/15/17 (g) 210,000 211,838
------------
1,798,538
------------
ELECTRICAL COMPONENTS & EQUIPMENT (0.0%)++
Emerson Electric Co.
6.00%, due 8/15/32 50,000 50,970
------------
ENERGY--ALTERNATE SOURCES (0.1%)
VeraSun Energy Corp.
9.375%, due 6/1/17 (b) 120,000 98,700
------------
ENTERTAINMENT (1.2%)
Gaylord Entertainment Co.
8.00%, due 11/15/13 200,000 203,500
Isle of Capri Casinos, Inc.
7.00%, due 3/1/14 90,000 79,875
Jacobs Entertainment, Inc.
9.75%, due 6/15/14 115,000 116,150
Mohegan Tribal Gaming Authority
6.375%, due 7/15/09 25,000 24,750
6.875%, due 2/15/15 10,000 9,775
7.125%, due 8/15/14 20,000 19,600
8.00%, due 4/1/12 85,000 86,806
Penn National Gaming, Inc.
6.75%, due 3/1/15 110,000 112,750
6.875%, due 12/1/11 30,000 30,225
Speedway Motorsports, Inc.
6.75%, due 6/1/13 290,000 286,375
Vail Resorts, Inc.
6.75%, due 2/15/14 295,000 291,313
------------
1,261,119
------------
ENVIRONMENTAL CONTROL (0.2%)
Geo Sub Corp.
11.00%, due 5/15/12 250,000 256,250
------------
FOOD (0.3%)
Pilgrims Pride Corp.
7.625%, due 5/1/15 25,000 25,125
8.375%, due 5/1/17 (g) 35,000 35,263
Smithfield Foods, Inc.
7.75%, due 7/1/17 65,000 66,950
Stater Brothers Holdings
7.75%, due 4/15/15 140,000 139,650
8.125%, due 6/15/12 20,000 20,200
------------
287,188
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FOREST PRODUCTS & PAPER (0.6%)
Bowater, Inc.
9.375%, due 12/15/21 $ 180,000 $ 150,300
9.50%, due 10/15/12 5,000 4,400
Georgia-Pacific Corp.
7.00%, due 1/15/15 (b) 110,000 107,800
7.125%, due 1/15/17 (b) 180,000 175,500
7.75%, due 11/15/29 4,000 3,820
8.00%, due 1/15/24 68,000 66,980
8.875%, due 5/15/31 160,000 160,000
------------
668,800
------------
HAND & MACHINE TOOLS (0.1%)
Thermadyne Holdings Corp.
10.50%, due 2/1/14 (g) 65,000 63,700
------------
HEALTH CARE--PRODUCTS (0.5%)
Hanger Orthopedic Group, Inc.
10.25%, due 6/1/14 165,000 171,600
LVB Acquisition Merger
10.00%, due 10/15/17 (b) 105,000 107,888
11.625%, due 10/15/17 (b) 100,000 101,875
PTS Acquisition Corp.
9.50%, due 4/15/15 (b)(h) 145,000 139,925
------------
521,288
------------
HEALTH CARE--SERVICES (0.9%)
Alliance Imaging, Inc.
7.25%, due 12/15/12 100,000 95,500
Community Health Systems, Inc.
8.875%, due 7/15/15 (b) 180,000 182,250
HCA, Inc.
6.30%, due 10/1/12 130,000 116,675
8.75%, due 9/1/10 35,000 35,613
9.25%, due 11/15/16 170,000 178,925
Highmark, Inc.
6.80%, due 8/15/13 (b) 245,000 260,371
Psychiatric Solutions, Inc.
7.75%, due 7/15/15 90,000 91,575
Skilled Healthcare Group, Inc.
11.00%, due 1/15/14 52,000 56,550
------------
1,017,459
------------
HOLDING COMPANIES--DIVERSIFIED (0.1%)
Leucadia National Corp.
8.125%, due 9/15/15 115,000 116,006
------------
</Table>
14 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ----------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS & WARES (0.2%)
ACCO Brands Corp.
7.625%, due 8/15/15 $ 100,000 $ 95,000
Jarden Corp.
7.50%, due 5/1/17 75,000 71,250
------------
166,250
------------
INSURANCE (0.7%)
Crum & Forster Holdings Corp.
7.75%, due 5/1/17 220,000 218,350
Fund American Cos., Inc.
5.875%, due 5/15/13 155,000 153,430
HUB International Holdings, Inc.
9.00%, due 12/15/14 (b) 195,000 187,200
Liberty Mutual Group, Inc.
7.80%, due 3/15/37 (b) 70,000 66,101
Lumbermens Mutual Casualty
8.45%, due 12/1/97 (b)(f) 35,000 263
9.15%, due 7/1/26 (b)(f) 535,000 4,013
USI Holdings Corp.
9.433%, due 11/15/14 (a)(b) 35,000 32,550
9.75%, due 5/15/15 (b) 95,000 83,838
------------
745,745
------------
IRON & STEEL (0.2%)
Allegheny Ludlum Corp.
6.95%, due 12/15/25 20,000 20,500
Allegheny Technologies, Inc.
8.375%, due 12/15/11 185,000 197,025
------------
217,525
------------
LODGING (0.8%)
Boyd Gaming Corp.
7.75%, due 12/15/12 345,000 355,350
MGM Mirage, Inc.
7.50%, due 6/1/16 115,000 114,281
MTR Gaming Group, Inc.
Series B
9.00%, due 6/1/12 115,000 115,000
Park Place Entertainment Corp.
7.00%, due 4/15/13 215,000 224,675
8.875%, due 9/15/08 35,000 35,481
------------
844,787
------------
MACHINERY--CONSTRUCTION & MINING (0.1%)
Caterpillar, Inc.
6.05%, due 8/15/36 140,000 142,485
------------
MEDIA (1.8%)
Houghton Mifflin Co.
7.20%, due 3/15/11 470,000 462,950
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MEDIA (CONTINUED)
LBI Media, Inc.
8.50%, due 8/1/17 (b) $ 80,000 $ 80,800
MediaNews Group, Inc.
6.875%, due 10/1/13 65,000 49,400
Morris Publishing Group LLC
7.00%, due 8/1/13 220,000 168,850
Paxson Communications Corp.
8.493%, due 1/15/12 (a)(b) 115,000 115,288
11.493%, due 1/15/13 (a)(b) 500,000 508,750
Time Warner Entertainment Co., L.P.
10.15%, due 5/1/12 415,000 488,817
Ziff Davis Media, Inc.
11.356%, due 5/1/12 (a) 135,000 129,600
------------
2,004,455
------------
METAL FABRICATE & HARDWARE (0.2%)
Metals USA, Inc.
11.125%, due 12/1/15 75,000 80,063
Neenah Foundary Co.
9.50%, due 1/1/17 130,000 119,600
------------
199,663
------------
MINING (0.2%)
Freeport-McMoRan Copper & Gold, Inc.
8.25%, due 4/1/15 55,000 59,400
8.375%, due 4/1/17 135,000 147,825
------------
207,225
------------
MISCELLANEOUS--MANUFACTURING (0.3%)
Actuant Corp.
6.875%, due 6/15/17 (b) 85,000 85,000
RBS Global, Inc./Rexnord Corp.
9.50%, due 8/1/14 185,000 191,013
------------
276,013
------------
OIL & GAS (2.5%)
Chaparral Energy, Inc.
8.50%, due 12/1/15 225,000 209,813
Chesapeake Energy Corp.
6.50%, due 8/15/17 215,000 207,475
6.875%, due 11/15/20 25,000 24,438
Energy Partners, Ltd.
10.368%, due 4/15/13 (a)(b) 90,000 90,675
Forest Oil Corp.
7.25%, due 6/15/19 (b) 110,000 110,000
8.00%, due 12/15/11 200,000 207,000
Hilcorp Energy I, L.P./Hilcorp Finance Co.
9.00%, due 6/1/16 (b) 100,000 103,750
Mariner Energy, Inc.
7.50%, due 4/15/13 230,000 223,675
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ----------------------------------------------------------------------------------
OIL & GAS (CONTINUED)
Newfield Exploration Co.
6.625%, due 4/15/16 $ 15,000 $ 14,700
Parker Drilling Co.
9.625%, due 10/1/13 80,000 85,400
Pemex Project Funding Master Trust
7.875%, due 2/1/09 500,000 517,250
Petroquest Energy, Inc.
10.375%, due 5/15/12 120,000 123,000
Pogo Producing Co.
6.625%, due 3/15/15 105,000 106,050
6.875%, due 10/1/17 310,000 313,875
Stone Energy Corp.
6.75%, due 12/15/14 100,000 92,375
Venoco, Inc.
8.75%, due 12/15/11 45,000 45,225
Whiting Petroleum Corp.
7.00%, due 2/1/14 300,000 295,125
------------
2,769,826
------------
OIL & GAS SERVICES (0.2%)
Allis-Chalmers Energy, Inc.
8.50%, due 3/1/17 70,000 68,425
9.00%, due 1/15/14 70,000 70,875
Complete Production Services, Inc.
8.00%, due 12/15/16 95,000 92,150
------------
231,450
------------
PACKAGING & CONTAINERS (0.1%)
Owens-Brockway Glass Container, Inc.
8.75%, due 11/15/12 10,000 10,438
8.875%, due 2/15/09 45,000 45,338
------------
55,776
------------
PHARMACEUTICALS (0.2%)
Medco Health Solutions, Inc.
7.25%, due 8/15/13 240,000 253,912
------------
PIPELINES (0.8%)
ANR Pipeline Co.
9.625%, due 11/1/21 145,000 197,325
Copano Energy LLC
8.125%, due 3/1/16 115,000 118,163
El Paso Natural Gas Co.
7.50%, due 11/15/26 25,000 26,553
7.625%, due 8/1/10 205,000 211,228
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
PIPELINES (CONTINUED)
MarkWest Energy Partners, L.P./ MarkWest Energy
Finance Corp.
Series B
6.875%, due 11/1/14 $ 145,000 $ 135,575
8.50%, due 7/15/16 40,000 40,000
Pacific Energy Partners, L.P./Pacific Energy
Finance Corp.
7.125%, due 6/15/14 115,000 118,820
------------
847,664
------------
REAL ESTATE (0.1%)
Host Hotels & Resorts, L.P.
6.875%, due 11/1/14 115,000 115,863
------------
REAL ESTATE INVESTMENT TRUSTS (0.4%)
Omega Healthcare Investors, Inc.
7.00%, due 4/1/14 145,000 146,088
Trustreet Properties, Inc.
7.50%, due 4/1/15 230,000 245,789
------------
391,877
------------
RETAIL (1.1%)
Burlington Coat Factory Warehouse Corp.
11.125%, due 4/15/14 (g) 95,000 86,450
CVS Caremark Corp.
5.789%, due 1/10/26 (b) 99,341 98,895
Harry & David Holdings, Inc.
9.00%, due 3/1/13 60,000 57,450
Rite Aid Corp.
7.50%, due 1/15/15 (g) 245,000 232,750
8.625%, due 3/1/15 150,000 133,125
9.375%, due 12/15/15 (b) 75,000 69,188
9.50%, due 6/15/17 (b) 70,000 64,750
Sbarro, Inc.
10.375%, due 2/1/15 (g) 115,000 103,931
Star Gas Partners, L.P./Star Gas Finance Co.
Series B
10.25%, due 2/15/13 171,000 178,268
Toys "R" Us, Inc.
7.625%, due 8/1/11 160,000 143,200
------------
1,168,007
------------
SOFTWARE (0.1%)
SS&C Technologies, Inc.
11.75%, due 12/1/13 110,000 118,525
------------
</Table>
16 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ----------------------------------------------------------------------------------
TELECOMMUNICATIONS (1.8%)
Dobson Cellular Systems, Inc.
8.375%, due 11/1/11 $ 40,000 $ 42,400
Series B
8.375%, due 11/1/11 70,000 74,200
9.875%, due 11/1/12 75,000 81,188
GCI, Inc.
7.25%, due 2/15/14 135,000 123,356
Intelsat Corp.
9.00%, due 6/15/16 145,000 148,263
Lucent Technologies, Inc.
6.45%, due 3/15/29 360,000 300,600
New Cingular Wireless Services, Inc.
8.75%, due 3/1/31 150,000 193,961
PanAmSat Corp.
9.00%, due 8/15/14 92,000 93,840
Qwest Communications International, Inc.
7.25%, due 2/15/11 215,000 217,150
Series B
7.50%, due 2/15/14 190,000 192,375
Qwest Corp.
5.625%, due 11/15/08 15,000 14,925
7.50%, due 10/1/14 180,000 187,875
7.50%, due 6/15/23 195,000 192,806
8.875%, due 3/15/12 100,000 109,500
------------
1,972,439
------------
TRANSPORTATION (0.0%)++
St. Acquisition Corp.
12.50%, due 5/15/17 (b)(g) 75,000 47,813
------------
TRUCKING & LEASING (0.1%)
Greenbrier Cos., Inc.
8.375%, due 5/15/15 70,000 69,213
------------
Total Corporate Bonds
(Cost $26,662,039) 26,670,656
------------
CORPORATE BONDS--FOREIGN (18.5%)
- ----------------------------------------------------------------------------------
ARGENTINA (0.1%)
Telecom Personal S.A.
9.25%, due 12/22/10 (b) 100,000 102,100
------------
BAHAMAS (0.1%)
Ultrapetrol, Ltd.
9.00%, due 11/24/14 100,000 98,000
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
BERMUDA (1.3%)
AES China Generating Co., Ltd.
8.25%, due 6/26/10 $ 230,000 $ 227,369
Asia Aluminum Holdings, Ltd.
8.00%, due 12/23/11 (b) 500,000 485,650
Citic Resources Finance, Ltd.
6.75%, due 5/15/14 (b) 200,000 192,000
Hopson Development Holdings, Ltd.
8.125%, due 11/9/12 (b) 150,000 144,375
Intelsat Subsidiary Holding Co., Ltd.
8.25%, due 1/15/13 230,000 231,725
Shanghai Real Estate, Ltd.
8.625%, due 4/24/13 200,000 184,966
------------
1,466,085
------------
BRAZIL (0.9%)
Braskem S.A.
Series Reg S
9.375%, due 6/1/15 150,000 168,750
Companhia Brasileira de Bebidas
10.50%, due 12/15/11 165,000 193,875
Companhia de Saneamento Basico do Estado de Sao
Paulo
7.50%, due 11/3/16 (b) 215,000 223,342
TAM Capital, Inc.
7.375%, due 4/25/17 (b) 400,000 358,000
------------
943,967
------------
CANADA (1.5%)
Angiotech Pharmaceuticals, Inc.
9.371%, due 12/1/13 (a) 60,000 59,400
Bowater Canada Finance
7.95%, due 11/15/11 65,000 55,738
CanWest MediaWorks, Inc.
8.00%, due 9/15/12 115,000 112,125
CanWest MediaWorks, L.P.
9.25%, due 8/1/15 (b) 120,000 121,800
Norske Skog Canada, Ltd.
Series D
8.625%, due 6/15/11 110,000 86,900
Nortel Networks, Ltd.
10.75%, due 7/15/16 (b) 115,000 119,888
Nova Chemicals Corp.
8.484%, due 11/15/13 (a) 65,000 63,863
Quebecor Media, Inc.
7.75%, due 3/15/16 180,000 174,150
7.75%, due 3/15/16 (b) 85,000 82,025
Quebecor World, Inc.
9.75%, due 1/15/15 (b) 135,000 131,625
Shaw Communications, Inc.
7.50%, due 11/20/13 C$ 225,000 256,023
Sun Media Corp.
7.625%, due 2/15/13 $ 210,000 206,850
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 17
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS--FOREIGN (CONTINUED)
- ----------------------------------------------------------------------------------
CANADA (CONTINUED)
Videotron Ltee
6.375%, due 12/15/15 $ 120,000 $ 115,800
------------
1,586,187
------------
CAYMAN ISLANDS (1.5%)
Cosan Finance, Ltd.
7.00%, due 2/1/17 (b) 395,000 380,188
Marfrig Overseas, Ltd.
Series Reg S
9.625%, due 11/16/16 250,000 262,500
Odebrecht Finance, Ltd.
7.50%, due 10/18/17 (b) 250,000 250,000
Shimao Property Holdings, Ltd.
8.00%, due 12/1/16 (b) 200,000 195,500
Vale Overseas, Ltd.
6.25%, due 1/11/16 200,000 203,835
6.25%, due 1/23/17 65,000 65,722
6.875%, due 11/21/36 190,000 197,513
8.25%, due 1/17/34 50,000 60,011
------------
1,615,269
------------
CHILE (0.2%)
AES Gener S.A.
7.50%, due 3/25/14 250,000 260,376
------------
FRANCE (0.6%)
Lafarge S.A.
6.625%, due 11/29/17 L 300,000 625,238
------------
GERMANY (0.7%)
Kreditanstalt fuer Wiederaufbau
Series E
5.50%, due 9/15/09 140,000 290,312
Series E
11.75%, due 8/8/08 ISK 12,000,000 198,476
Kyivstar GSM
10.375%, due 8/17/09 (b) $ 275,000 290,125
------------
778,913
------------
LUXEMBOURG (2.5%)
Covidien International Finance S.A.
6.00%, due 10/15/17 (b) 65,000 65,876
Evraz Group S.A.
8.25%, due 11/10/15 (b) 200,000 202,750
FMC Finance III S.A.
6.875%, due 7/15/17 (b) 215,000 215,538
Gaz Capital for Gazprom
Series E
4.56%, due 12/9/12 E 500,000 680,601
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LUXEMBOURG (CONTINUED)
Gazprom International S.A.
7.201%, due 2/1/20 (b) $ 90,640 $ 93,133
Millicom International Cellular S.A.
10.00%, due 12/1/13 135,000 145,294
Norilsk Nickel Finance
Luxembourg S.A.
7.125%, due 9/30/09 200,000 205,546
OJSC Russian Agricultural Bank
7.175%, due 5/16/13 (b) 100,000 103,140
OJSC Vimpel Communications
8.25%, due 5/23/16 (b) 300,000 310,500
Tengizchevroil Finance Co. S.A.R.L.
6.124%, due 11/15/14 (b) 100,000 96,000
TNK-BP Finance S.A.
7.50%, due 7/18/16 (b) 215,000 209,625
7.875%, due 3/13/18 (b) 400,000 395,500
------------
2,723,503
------------
MEXICO (2.0%)
America Movil SAB de C.V.
5.50%, due 3/1/14 100,000 99,750
8.46%, due 12/18/36 MXN 4,800,000 444,830
Controladora Mabe S.A. de C.V.
6.50%, due 12/15/15 (b) $ 150,000 152,250
6.50%, due 12/15/15 45,000 45,675
Grupo Gigante S.A. de C.V.
8.75%, due 4/13/16 (b)(g) 400,000 416,000
Grupo Televisa S.A.
6.625%, due 3/18/25 500,000 517,500
8.49%, due 5/11/37 MXN 2,500,000 231,463
Kansas City Southern de Mexico S.A. de C.V.
7.375%, due 6/1/14 (b) $ 30,000 30,000
Telefonos de Mexico S.A. de C.V.
5.50%, due 1/27/15 290,000 286,375
------------
2,223,843
------------
NETHERLANDS (2.4%)
ATF Capital B.V.
9.25%, due 2/21/14 (b) 810,000 834,300
Coca-Cola HBC Finance B.V.
5.125%, due 9/17/13 50,000 48,880
Electricidad de Caracas Finance B.V.
10.25%, due 10/15/14 (b) 95,000 96,900
Excelcomindo Finance Co. B.V.
7.125%, due 1/18/13 (b) 100,000 99,500
Intergen N.V.
9.00%, due 6/30/17 (b) 210,000 222,075
Kazkommerts International B.V.
7.625%, due 2/13/12 L 50,000 91,999
8.50%, due 4/16/13 (b) $ 400,000 381,000
</Table>
18 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS--FOREIGN (CONTINUED)
- ----------------------------------------------------------------------------------
NETHERLANDS (CONTINUED)
Lukoil International Finance B.V.
6.356%, due 6/7/17 (b) $ 400,000 $ 385,000
Majapahit Holdings B.V.
7.75%, due 10/17/16 (b) 100,000 103,130
Temir Capital B.V.
9.50%, due 5/21/14 (b) 300,000 249,750
TuranAlem Finance B.V.
7.75%, due 4/25/13 (b) 100,000 89,000
------------
2,601,534
------------
PANAMA (0.2%)
AES El Salvador Trust
6.75%, due 2/1/16 (b) 200,000 199,560
------------
PHILIPPINES (0.2%)
National Power Corp.
6.875%, due 11/2/16 (b)(g) 200,000 204,750
------------
QATAR (0.2%)
Ras Laffan Liquefied Natural
Gas Co., Ltd. III
6.332%, due 9/30/27 (b) 250,000 246,465
------------
RUSSIA (0.3%)
OAO Gazprom
9.625%, due 3/1/13 (b) 160,000 184,400
Siberian Oil Co.
Series Reg S
10.75%, due 1/15/09 100,000 105,240
------------
289,640
------------
SOUTH KOREA (0.1%)
Hynix Semiconductor, Inc.
7.875%, due 6/27/17 (b) 100,000 95,250
------------
SUPRANATIONAL (1.3%)
Inter-American Development Bank
13.00%, due 6/20/08 ISK 37,500,000 624,477
INVISTA
9.25%, due 5/1/12 (b) $ 355,000 374,525
NXP B.V./NXP Funding LLC
7.875%, due 10/15/14 (g) 255,000 248,944
9.50%, due 10/15/15 (g) 170,000 160,650
------------
1,408,596
------------
UNITED ARAB EMIRATES (0.5%)
DP World, Ltd.
6.85%, due 7/2/37 (b) 600,000 602,356
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
UNITED KINGDOM (1.5%)
BSKYB Finance UK PLC
6.50%, due 10/15/35 (b) $ 95,000 $ 93,102
Galaxy Entertainment Finance Co., Ltd.
9.875%, due 12/15/12 (b) 55,000 58,988
Series Reg S
9.875%, due 12/15/12 500,000 532,500
GTL Trade Finance, Inc.
7.25%, due 10/20/17 (b) 300,000 303,821
Independent News & Media Finance, Ltd.
5.75%, due 5/17/09 E 300,000 434,565
Inmarsat Finance PLC
(zero coupon), due 11/15/12
10.375%, beginning 11/15/08 $ 250,000 241,250
------------
1,664,226
------------
VENEZUELA (0.4%)
Petroleos de Venezuela S.A.
5.50%, due 4/12/37 670,000 417,075
------------
Total Corporate Bonds--Foreign
(Cost $19,927,073) 20,152,933
------------
FOREIGN GOVERNMENT BONDS (24.9%)
- ----------------------------------------------------------------------------------
ARGENTINA (1.4%)
Republic of Argentina
(zero coupon), due 12/15/35 (a) 5,140,000 706,750
8.28%, due 12/31/33 870,718 881,602
------------
1,588,352
------------
AUSTRALIA (0.8%)
Commonwealth of Australia
5.75%, due 5/15/21 A$ 1,000,000 897,466
------------
AUSTRIA (0.9%)
Republic of Austria
4.65%, due 1/15/18 E 643,000 953,520
------------
BELGIUM (0.5%)
Kingdom of Belgium
5.00%, due 9/28/11 400,000 596,299
------------
BRAZIL (3.0%)
Federal Republic of Brazil
V 8.25%, due 1/20/34 $ 1,321,000 1,712,016
V 12.50%, due 1/5/22 BRL 2,300,000 1,544,940
------------
3,256,956
------------
CANADA (0.1%)
Export Development Canada
13.00%, due 8/11/08 ISK 6,300,000 104,780
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 19
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FOREIGN GOVERNMENT BONDS (CONTINUED)
- ----------------------------------------------------------------------------------
COLOMBIA (1.2%)
Republic of Colombia
7.375%, due 1/27/17 $ 400,000 $ 441,400
8.125%, due 5/21/24 300,000 360,750
12.00%, due 10/22/15 CP 992,000,000 564,892
------------
1,367,042
------------
EGYPT (0.2%)
Republic of Egypt
(zero coupon), due 2/12/08 EGP 1,400,000 249,039
------------
EL SALVADOR (0.3%)
Republic of El Salvador
7.75%, due 1/24/23 (b) $ 250,000 290,000
------------
GERMANY (1.6%)
Republic of Germany
V 5.00%, due 7/4/11 E 755,000 1,124,278
6.25%, due 1/4/30 350,000 626,871
------------
1,751,149
------------
GREECE (2.2%)
Hellenic Republic
V 4.50%, due 5/20/14 1,200,000 1,751,888
5.90%, due 10/22/22 406,000 662,696
------------
2,414,584
------------
INDONESIA (0.4%)
Republic of Indonesia
6.875%, due 3/9/17 (b)(g) $ 200,000 210,500
7.25%, due 4/20/15 (b)(g) 180,000 193,050
------------
403,550
------------
ITALY (2.4%)
Republic of Italy
5.50%, due 11/1/10 E 600,000 899,836
6.00%, due 5/1/31 625,000 1,056,545
6.50%, due 11/1/27 372,000 658,606
------------
2,614,987
------------
LEBANON (0.2%)
Republic of Lebanon
Series Reg S
8.25%, due 4/12/21 $ 275,000 250,938
------------
MEXICO (1.6%)
United Mexican States
V 6.75%, due 9/27/34 1,300,000 1,454,050
7.25%, due 12/15/16 MXN 3,000,000 269,487
------------
1,723,537
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
PANAMA (1.3%)
Republic of Panama
6.70%, due 1/26/36 $ 243,000 $ 255,150
8.875%, due 9/30/27 325,000 421,688
9.375%, due 4/1/29 550,000 748,000
------------
1,424,838
------------
PERU (1.0%)
Republic of Peru
6.55%, due 3/14/37 300,000 315,750
7.35%, due 7/21/25 475,000 545,063
8.75%, due 11/21/33 152,000 202,920
------------
1,063,733
------------
PHILIPPINES (0.7%)
Republic of Philippines
7.75%, due 1/14/31 200,000 228,000
9.50%, due 2/2/30 (g) 250,000 335,938
9.875%, due 1/15/19 (g) 200,000 260,000
------------
823,938
------------
SRI LANKA (0.3%)
Republic of Sri Lanka
8.25%, due 10/24/12 (b) 300,000 298,125
------------
TURKEY (1.4%)
Republic of Turkey
7.25%, due 3/15/15 400,000 423,520
7.375%, due 2/5/25 470,000 498,811
14.00%, due 1/19/11 TRY 670,000 576,264
------------
1,498,595
------------
UKRAINE (0.2%)
Ukraine Government
6.875%, due 3/4/11 (b) $ 175,000 180,478
------------
UNITED KINGDOM (2.1%)
United Kingdom Treasury Bonds
4.00%, due 3/7/09 L 97,000 198,643
4.25%, due 6/7/32 150,000 295,614
4.25%, due 3/7/36 205,000 406,606
5.00%, due 3/7/12 315,000 655,569
6.00%, due 12/7/28 285,000 692,922
------------
2,249,354
------------
URUGUAY (0.2%)
Republic of Uruguay
8.00%, due 11/18/22 $ 173,130 197,368
------------
</Table>
20 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FOREIGN GOVERNMENT BONDS (CONTINUED)
- ----------------------------------------------------------------------------------
VENEZUELA (0.9%)
Republic of Venezuela
Series Reg S
6.18%, due 4/20/11 (a) $ 200,000 $ 190,000
9.25%, due 9/15/27 475,000 520,600
13.625%, due 8/15/18 181,000 245,255
------------
955,855
------------
Total Foreign Government Bonds
(Cost $23,556,812) 27,154,483
------------
LOAN ASSIGNMENTS & PARTICIPATIONS (2.4%) (i)
- ----------------------------------------------------------------------------------
AEROSPACE & DEFENSE (0.1%)
DAE Aviation Holdings
Tranche B-1 Term Loan
8.933%, due 7/31/14 62,603 62,486
Tranche B2 Term Loan
8.933%, due 7/31/14 47,397 47,308
------------
109,794
------------
CHEMICALS (0.1%)
Talecris Biotherapeutics, Inc.
2nd Lien Term Loan
12.08%, due 12/6/14 120,000 120,000
------------
HEALTH CARE--SERVICES (0.6%)
Community Health Systems, Inc.
New Term Loan B
7.756%, due 7/25/14 190,000 185,369
HCA, Inc.
Term Loan B
7.448%, due 11/18/13 406,925 397,111
------------
582,480
------------
MEDIA (0.3%)
Nielsen Finance LLC
Dollar Term Loan
7.36%, due 8/9/13 346,501 336,875
------------
MINING (0.2%)
BHM Technologies LLC
1st Lien Term Loan
11.37%, due 7/21/13 294,894 252,871
------------
REAL ESTATE (0.6%)
Building Materials Corp. of America
2nd Lien Term Loan
10.813%, due 9/25/14 100,000 82,700
LNR Property Corp.
Initial Tranche B Term Loan
8.11%, due 7/12/11 350,000 340,725
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
REAL ESTATE (CONTINUED)
Rental Services Corp.
2nd Lien Term Loan
8.75%, due 11/27/13 $ 79,584 $ 77,445
Riverdeep Interactive Learning USA, Inc.
Bridge Loan
11.938%, due 12/21/14 55,060 54,819
Transfirst Holdings, Inc.
Term Loan B
7.95%, due 6/15/14 99,750 95,511
------------
651,200
------------
RETAIL (0.3%)
Michaels Stores, Inc.
New Term Loan B
7.619%, due 10/31/13 99,497 95,088
Neiman Marcus Group, Inc. (The)
Term Loan B
7.448%, due 4/6/13 123,418 121,186
Toys "R" Us (Delaware), Inc.
Term Loan
10.125%, due 1/19/13 145,000 145,030
------------
361,304
------------
SOFTWARE (0.2%)
SunGard Data Systems, Inc.
Term Loan
7.356%, due 2/28/14 166,194 163,758
------------
Total Loan Assignments & Participations
(Cost $2,676,737) 2,578,282
------------
MORTGAGE-BACKED SECURITIES (2.4%)
- ----------------------------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (2.4%)
Banc of America Commercial Mortgage, Inc.
Series 2005-5, Class A2
5.001%, due 10/10/45 295,000 293,474
Bayview Commercial Asset Trust
Series 2006-4A, Class A1
5.361%, due 12/25/36 (a)(b) 100,373 99,761
Citigroup Commercial
Mortgage Trust
Series 2004-C2, Class A5
4.733%, due 10/15/41 220,000 209,965
Citigroup/Deutsche Bank Commercial Mortgage Trust
Series 2005-CD1, Class A4
5.225%, due 7/15/44 440,000 432,770
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 21
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MORTGAGE-BACKED SECURITIES (CONTINUED)
- ----------------------------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (CONTINUED)
Four Times Square Trust
Series 2006-4TS, Class A
5.401%, due 12/13/28 (b) $ 120,000 $ 115,078
LB-UBS Commercial Mortgage Trust
Series 2004-C2, Class A2
3.246%, due 3/15/29 425,000 415,635
Series 2004-C7, Class A1
3.625%, due 10/15/29 139,180 137,138
Series 2005-C7, Class A4
5.197%, due 11/15/30 235,000 229,223
Merrill Lynch Mortgage Trust
Series 2004-MKB1, Class A1
3.563%, due 2/12/42 110,259 108,931
Series 2004-BPC1, Class A5
4.855%, due 10/12/41 (a) 555,000 534,217
Timberstar Trust
Series 2006-1, Class A
5.668%, due 10/15/36 (b)(d) 40,000 39,750
Wachovia Bank Commercial Mortgage Trust
Series 2004-C14, Class A1
3.477%, due 8/15/41 43,685 43,035
------------
Total Mortgage-Backed Securities
(Cost $2,719,471) 2,658,977
------------
MUNICIPAL BONDS (0.4%)
- ----------------------------------------------------------------------------------
OHIO (0.2%)
Buckeye, Ohio, Tobacco Settlement Financing
Authority
5.75%, due 6/1/34 250,000 241,250
------------
TEXAS (0.1%)
Harris County Texas Industrial Development Corp.
Solid Waste Deer Park
5.683%, due 3/1/23 (a) 120,000 118,974
------------
WEST VIRGINIA (0.1%)
Tobacco Settlement Finance Authority of West
Virginia
7.467%, due 6/1/47 100,000 98,037
------------
Total Municipal Bonds
(Cost $462,523) 458,261
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & FEDERAL AGENCIES (16.6%)
- ----------------------------------------------------------------------------------
FANNIE MAE (COLLATERALIZED MORTGAGE OBLIGATION) (0.1%)
Series 2006-B1, Class AB
6.00%, due 6/25/16 $ 132,965 $ 134,302
------------
FANNIE MAE GRANTOR TRUST
(COLLATERALIZED MORTGAGE OBLIGATION) (0.0%)++
Series 1998-M6, Class A2
6.32%, due 8/15/08 (j) 29,944 30,022
------------
FEDERAL HOME LOAN MORTGAGE CORPORATION (1.2%)
4.75%, due 11/17/15 740,000 734,480
6.25%, due 7/15/32 525,000 599,538
------------
1,334,018
------------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(MORTGAGE PASS-THROUGH SECURITIES) (0.2%)
3.00%, due 8/1/10 77,465 74,308
4.311%, due 3/1/35 (a) 112,955 111,457
------------
185,765
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (12.4%)
4.625%, due 5/1/13 135,000 133,741
V 4.875%, due 5/18/12 6,450,000 6,520,352
5.125%, due 1/2/14 150,000 151,433
5.25%, due 8/1/12 1,035,000 1,054,919
V 5.375%, due 6/12/17 (g) 2,075,000 2,142,186
V 6.25%, due 2/1/11 2,260,000 2,372,546
V 6.625%, due 9/15/09 1,150,000 1,196,743
------------
13,571,920
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (0.2%)
6.00%, due 9/1/34 87,613 88,451
6.00%, due 9/1/35 89,171 90,112
------------
178,563
------------
FREDDIE MAC (COLLATERALIZED MORTGAGE OBLIGATION) (0.2%)
Series 2632, Class NH
3.50%, due 6/15/13 171,462 165,771
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITY) (0.0%)++
6.00%, due 8/15/32 3 3
------------
OVERSEAS PRIVATE INVESTMENT CORPORATION (1.1%)
V 5.142%, due 12/15/23 (k) 1,200,000 1,211,700
------------
</Table>
22 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
- ----------------------------------------------------------------------------------
UNITED STATES TREASURY NOTES (1.2%)
3.875%, due 9/15/10 (g) $ 1,115,000 $ 1,112,822
4.75%, due 8/15/17 (g) 215,000 219,737
------------
1,332,559
------------
Total U.S. Government & Federal Agencies
(Cost $18,125,734) 18,144,623
------------
YANKEE BONDS (0.4%) (l)
- ----------------------------------------------------------------------------------
FOREST PRODUCTS & PAPER (0.3%)
Abitibi-Consolidated, Inc.
8.85%, due 8/1/30 60,000 44,400
Smurfit Capital Funding PLC
7.50%, due 11/20/25 245,000 237,650
------------
282,050
------------
INSURANCE (0.1%)
Fairfax Financial Holdings, Ltd.
7.375%, due 4/15/18 (g) 35,000 32,550
7.75%, due 7/15/37 (g) 35,000 32,550
8.30%, due 4/15/26 (g) 10,000 9,550
------------
74,650
------------
OIL & GAS (0.0%)++
YPF Sociedad Anonima
9.125%, due 2/24/09 60,000 62,280
------------
Total Yankee Bonds
(Cost $412,338) 418,980
------------
MEDIUM-TERM NOTE (0.2%)
- ----------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (0.2%)
Lehman Brothers Holdings, Inc.
6.20%, due 9/26/14 250,000 251,622
------------
Total Medium-Term Note
(Cost $249,792) 251,622
------------
Total Long-Term Bonds
(Cost $98,801,334) 102,525,771
------------
<Caption>
SHARES
COMMON STOCKS (0.9%)
- ----------------------------------------------------------------------------------
AGRICULTURE (0.0%)++
North Atlantic Trading
Co., Inc. (c)(d)(m)(n) 522 5
------------
</Table>
<Table>
<Caption>
SHARES VALUE
AIRLINES (0.4%)
Delta Air Lines, Inc. (g)(m) 5,825 $ 121,160
Northwest Airlines, Inc. (m) 17,174 318,578
------------
439,738
------------
DIVERSIFIED FINANCIAL SERVICES (0.0%)++
Adelphia Contingent Value Vehicle (c)(d)(f)(m) 100,330 1,003
------------
MEDIA (0.2%)
Haights Cross
Communications, Inc. (c)(d)(m)(n) 15,988 154,284
------------
RETAIL (0.0%)++
Star Gas Partners, L.P. (m) 6,675 30,571
------------
SOFTWARE (0.1%)
QuadraMed Corp. (c)(m) 25,588 71,391
------------
TELECOMMUNICATIONS (0.2%)
Loral Space &
Communications, Ltd. (m) 1,760 71,069
Neon Communications
Group, Inc. (d)(m)(n) 37,056 162,213
------------
233,282
------------
Total Common Stocks
(Cost $774,354) 930,274
------------
CONVERTIBLE PREFERRED STOCKS (1.4%)
- ----------------------------------------------------------------------------------
CHEMICALS (0.3%)
Celanese Corp.
4.25% 5,635 302,769
------------
INVESTMENT COMPANIES (0.4%)
Vale Capital, Ltd.
5.50% Series RIO 5,090 372,690
------------
PHARMACEUTICALS (0.2%)
Schering-Plough Corp.
6.00% 940 250,275
------------
SOFTWARE (0.2%)
QuadraMed Corp.
5.50% (b)(c)(n) 10,400 244,400
------------
TELECOMMUNICATIONS (0.0%)++
Neon Communications Group, Inc.
6.00% (c)(d) 5,076 23,527
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 23
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
CONVERTIBLE PREFERRED STOCKS (CONTINUED)
- ----------------------------------------------------------------------------------
TRANSPORTATION (0.3%)
Bristow Group, Inc.
5.50% 4,410 $ 282,857
------------
Total Convertible Preferred Stocks
(Cost $1,270,037) 1,476,518
------------
PREFERRED STOCKS (0.4%)
- ----------------------------------------------------------------------------------
MEDIA (0.0%)++
Ziff Davis Holdings, Inc.
10.00% (c) 48 720
------------
REAL ESTATE INVESTMENT TRUSTS (0.4%)
Sovereign Real Estate Investment Corp.
12.00% (b)(c) 295 411,968
------------
TELECOMMUNICATIONS (0.0%)++
Loral Skynet Corp.
12.00% Series A (h) 391 78,396
------------
Total Preferred Stocks
(Cost $354,459) 491,084
------------
<Caption>
NUMBER OF
CONTRACTS
PURCHASED CALL OPTION (0.1%)
- ----------------------------------------------------------------------------------
REAL ESTATE (0.1%)
Australian Dollar Strike Price $0.93
Expire 4/28/08 4,000,000 112,000
------------
Total Purchased Call Option
(Premium $86,600) 112,000
------------
PURCHASED PUT OPTION (0.0%)++
- ----------------------------------------------------------------------------------
REAL ESTATE (0.0%)++
British Pound Strike Price $2.01
Expire 3/27/08 4,000,000 32,000
------------
Total Purchased Put Option
(Premium $80,900) 32,000
------------
<Caption>
NUMBER OF
WARRANTS
WARRANTS (0.0%)++
- ----------------------------------------------------------------------------------
MEDIA (0.0%)++
Haights Cross Communications, Inc.
Strike Price $0.001
Expire 7/31/08 (c)(d)(m)(n) 223 2,150
</Table>
<Table>
<Caption>
NUMBER OF
WARRANTS VALUE
MEDIA (CONTINUED)
Ziff Davis Holdings, Inc.
Strike Price $0.001
Expire 8/12/12 (d)(m) 8,954 $ 90
------------
Total Warrants
(Cost $120) 2,240
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (8.0%)
- ----------------------------------------------------------------------------------
COMMERCIAL PAPER (0.6%)
Deutsche Bank Financial LLC
4.77%, due 11/1/07 $ 635,000 635,000
------------
Total Commercial Paper
(Cost $635,000) 635,000
------------
<Caption>
SHARES
INVESTMENT COMPANY (6.5%)
State Street Navigator Securities Lending Prime
Portfolio (o) 7,126,910 7,126,910
------------
Total Investment Company
(Cost $7,126,910) 7,126,910
------------
<Caption>
PRINCIPAL
AMOUNT
U.S. GOVERNMENT (0.9%)
United States Treasury Bill
3.625%, due 11/8/07 $ 1,000,000 999,295
------------
Total U.S. Government
(Cost $999,295) 999,295
------------
Total Short-Term Investments
(Cost $8,761,205) 8,761,205
------------
Total Investments
(Cost $110,129,009) 104.8% 114,331,092(p)
Liabilities in Excess of
Cash and Other Assets (4.8) (5,283,011)
--------------- ------------
Net Assets 100.0% $109,048,081
=============== ============
</Table>
24 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
++ Less than one-tenth of a percent.
+++ All of the Fund's liquid assets are maintained to cover
"senior securities transactions" which may include, but are
not limited to, forwards, TBA's, options and futures. This
percentage is marked-to-market daily against the value of
the Fund's "senior securities" holdings to ensure proper
coverage for these transactions.
(a) Floating rate. Rate shown is the rate in effect at October
31, 2007.
(b) May be sold to institutional investors only under Rule 144a
or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(c) Illiquid security. The total market value of these
securities at October 31, 2007 is $981,973, which represents
0.9% of the Fund's net assets.
(d) Fair valued security. The total market value of these
securities at October 31, 2007 is $455,547, which reflects
0.4% of the Fund's net assets.
(e) Subprime mortgage investment. The total market value of
these securities at October 31, 2007 is $215,977, which
represents 0.2% of the Fund's net assets.
(f) Issue in default.
(g) Represents a security, or a portion thereof, which is out on
loan. The aggregate market value of such securities is
$6,958,822; cash collateral of $7,126,910 (included in
liabilities) was received with which the Fund purchased
highly liquid short-term investments.
(h) PIK ("Payment in Kind")--interest or dividend payment is
made with additional securities.
(i) Floating Rate Loan--generally pays interest at rates which
are periodically re-determined at a margin above the London
Inter-Bank Offered Rate ("LIBOR") or other short-term rates.
The rate shown is the rate(s) in effect at October 31, 2007.
Floating Rate Loans are generally considered restrictive in
that the Fund is ordinarily contractually obligated to
receive consent from the Agent Bank and/or borrower prior to
disposition of a Floating Rate Loan.
(j) ACES--Alternative Credit Enhancement Structure.
(k) United States Government Guaranteed Security.
(l) Yankee Bond--dollar-denominated bond issued in the United
States by a foreign bank or corporation.
(m) Non-income producing security.
(n) Restricted security.
(o) Represents a security, or a portion thereof, purchased with
cash collateral received for securities on loan.
(p) At October 31, 2007, cost is $111,243,680 for federal income
tax purposes and net unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 4,452,581
Gross unrealized depreciation (1,365,169)
-----------
Net unrealized appreciation $ 3,087,412
===========
</Table>
<Table>
The following abbreviations are used in the above portfolio:
A$--Australian Dollar
BRL--Brazilian Real
C$--Canadian Dollar
CP--Colombian Peso
EGP--Egyptian Pound
E--Euro
L--British Pound Sterling
ISK--Icelandic Krona
MXN--Mexican Peso
TRY--New Turkish Lira
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 25
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2007
<Table>
ASSETS:
Investment in securities, at value
(identified cost $110,129,009) including
$6,958,822 market value of securities loaned $114,331,092
Cash 280,822
Cash denominated in foreign currencies
(identified cost $44,509) 44,809
Receivables:
Dividends and interest 1,976,155
Investment securities sold 630,004
Fund shares sold 52,460
Other assets 13,225
Unrealized appreciation on foreign currency
forward contracts 175,115
-------------
Total assets 117,503,682
-------------
LIABILITIES:
Securities lending collateral 7,126,910
Payables:
Investment securities purchased 439,180
Fund shares redeemed 134,028
Manager (See Note 3) 61,122
NYLIFE Distributors (See Note 3) 52,257
Transfer agent (See Note 3) 49,062
Shareholder communication 46,297
Custodian 19,715
Professional fees 16,149
Trustees 1,473
Accrued expenses 2,476
Dividend payable 107,841
Unrealized depreciation on foreign currency
forward contracts 399,091
-------------
Total liabilities 8,455,601
-------------
Net assets $109,048,081
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized $ 121,071
Additional paid-in capital 109,979,695
-------------
110,100,766
Accumulated distributions in excess of net
investment income (644,207)
Accumulated net realized loss on investments (4,443,280)
Net unrealized appreciation on investments 4,202,083
Net unrealized depreciation on translation of
other assets and liabilities in foreign
currencies and foreign currency forward
contracts (167,281)
-------------
Net assets $109,048,081
=============
CLASS A
Net assets applicable to outstanding shares $ 68,636,927
=============
Shares of beneficial interest outstanding 7,612,356
=============
Net asset value per share outstanding $ 9.02
Maximum sales charge (4.50% of offering price) 0.43
-------------
Maximum offering price per share outstanding $ 9.45
=============
CLASS B
Net assets applicable to outstanding shares $ 28,068,659
=============
Shares of beneficial interest outstanding 3,121,571
=============
Net asset value and offering price per share
outstanding $ 8.99
=============
CLASS C
Net assets applicable to outstanding shares $ 12,080,747
=============
Shares of beneficial interest outstanding 1,344,123
=============
Net asset value and offering price per share
outstanding $ 8.99
=============
CLASS I
Net assets applicable to outstanding shares $ 261,748
=============
Shares of beneficial interest outstanding 29,022
=============
Net asset value and offering price per share
outstanding $ 9.02
=============
</Table>
26 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2007
<Table>
INVESTMENT INCOME:
INCOME:
Interest $6,898,670
Dividends 69,955
Income from securities loaned--net 19,020
-----------
Total income 6,987,645
-----------
EXPENSES:
Manager (See Note 3) 665,009
Distribution--Class B (See Note 3) 234,203
Distribution--Class C (See Note 3) 98,216
Transfer agent--Classes A, B and C (See Note
3) 289,370
Transfer agent--Class I (See Note 3) 349
Distribution/Service--Class A (See Note 3) 165,726
Service--Class B (See Note 3) 78,068
Service--Class C (See Note 3) 32,739
Custodian 77,439
Professional fees 69,844
Shareholder communication 54,339
Registration 52,808
Recordkeeping 37,750
Trustees 8,118
Miscellaneous 2,437
-----------
Total expenses before waiver 1,866,415
Expense waiver from Manager (See Note 3) (93,916)
-----------
Net expenses 1,772,499
-----------
Net investment income 5,215,146
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) on:
Security transactions 2,396,459
Foreign currency transactions (352,335)
-----------
Net realized gain on investments and foreign
currency transactions 2,044,124
-----------
Net change in unrealized appreciation on:
Security transactions and unfunded loan
commitments 244,351
Translation of other assets and liabilities in
foreign currencies and foreign currency
forward contracts (168,479)
-----------
Net change in unrealized appreciation on
investments, unfunded loan commitments and
foreign currency transactions 75,872
-----------
Net realized and unrealized gain on investments,
foreign currency transactions and unfunded
loan commitments 2,119,996
-----------
Net increase in net assets resulting from
operations $7,335,142
===========
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 27
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2007 AND OCTOBER 31, 2006
<Table>
<Caption>
2007 2006
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 5,215,146 $ 4,935,048
Net realized gain on investments
and foreign currency transactions 2,044,124 541,651
Net change in unrealized
appreciation on investments,
unfunded loan commitments and
foreign currency transactions 75,872 1,647,581
---------------------------
Net increase in net assets
resulting from operations 7,335,142 7,124,280
---------------------------
Dividends to shareholders:
From net investment income:
Class A (3,741,394) (3,043,145)
Class B (1,549,496) (2,170,137)
Class C (645,805) (592,217)
Class I (13,279) (13,052)
---------------------------
Total dividends to shareholders (5,949,974) (5,818,551)
---------------------------
Capital share transactions:
Net proceeds from sale of shares 23,037,979 19,973,282
Net asset value of shares issued
to shareholders in reinvestment
of dividends 4,506,261 4,106,067
Cost of shares redeemed (32,150,036) (38,942,928)
Net asset value of shares
converted (See Note 1):
Class A 3,826,085 25,063,683
Class B (3,826,085) (25,083,683)
---------------------------
Decrease in net assets derived
from capital share transactions (4,605,796) (14,863,579)
---------------------------
Net decrease in net assets (3,220,628) (13,557,850)
NET ASSETS:
Beginning of year 112,268,709 125,826,559
---------------------------
End of year $109,048,081 $112,268,709
===========================
Accumulated distributed in excess
of net investment income at end of
year $ (644,207) $ (1,013,401)
===========================
</Table>
28 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
www.mainstayfunds.com 29
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
---------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of period $ 8.91 $ 8.81 $ 9.01 $ 8.77 $ 7.97 $ 8.22
------- ------- ------- ------- ----------- ------------
Net investment income (a) 0.45 0.40 0.39 0.40 0.39 0.55
Net realized and unrealized gain (loss) on
investments 0.21 0.18 (0.24) 0.37 0.86 (0.03)
Net realized and unrealized gain (loss) on
foreign currency transactions (0.04) (0.01) 0.04 (0.05) 0.01 (0.15)
------- ------- ------- ------- ----------- ------------
Total from investment operations 0.62 0.57 0.19 0.72 1.26 0.37
------- ------- ------- ------- ----------- ------------
Less dividends and distributions:
From net investment income (0.51) (0.47) (0.39) (0.48) (0.38) (0.46)
Return of capital -- -- -- -- (0.08) (0.16)
------- ------- ------- ------- ----------- ------------
Total dividends and distributions (0.51) (0.47) (0.39) (0.48) (0.46) (0.62)
------- ------- ------- ------- ----------- ------------
Net asset value at end of period $ 9.02 $ 8.91 $ 8.81 $ 9.01 $ 8.77 $ 7.97
======= ======= ======= ======= =========== ============
Total investment return (b) 7.14% 6.67% 2.11% 8.44% 16.22%(c) 4.78%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 5.01% 4.60% 4.32% 4.48% 5.59%+ 6.95%
Net expenses 1.30% 1.30% 1.34% 1.41% 1.46%+ 1.49%
Expenses (before waiver) 1.39% 1.46% 1.40% 1.41% 1.46%+ 1.49%
Portfolio turnover rate 64% 87%(d) 105% 84% 80% 84%
Net assets at end of period (in 000's) $68,637 $65,566 $40,076 $37,179 $31,042 $18,297
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of period $ 8.89 $ 8.78 $ 8.99 $ 8.75 $ 7.95 $ 8.20
------- ------- ------- ------- ----------- ------------
Net investment income (a) 0.38 0.34 0.32 0.33 0.34 0.49
Net realized and unrealized gain (loss) on
investments 0.20 0.18 (0.25) 0.39 0.86 (0.03)
Net realized and unrealized gain (loss) on
foreign currency transactions (0.04) (0.01) 0.04 (0.06) 0.01 (0.15)
------- ------- ------- ------- ----------- ------------
Total from investment operations 0.54 0.51 0.11 0.66 1.21 0.31
------- ------- ------- ------- ----------- ------------
Less dividends and distributions:
From net investment income (0.44) (0.40) (0.32) (0.42) (0.34) (0.42)
Return of capital -- -- -- -- (0.07) (0.14)
------- ------- ------- ------- ----------- ------------
Total dividends and distributions (0.44) (0.40) (0.32) (0.42) (0.41) (0.56)
------- ------- ------- ------- ----------- ------------
Net asset value at end of period $ 8.99 $ 8.89 $ 8.78 $ 8.99 $ 8.75 $ 7.95
======= ======= ======= ======= =========== ============
Total investment return (b) 6.23% 6.01% 1.23% 7.68% 15.55%(c) 3.99%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 4.26% 3.85% 3.57% 3.73% 4.84%+ 6.20%
Net expenses 2.05% 2.05% 2.09% 2.16% 2.21%+ 2.24%
Expenses (before waiver) 2.13% 2.21% 2.15% 2.16% 2.21%+ 2.24%
Portfolio turnover rate 64% 87%(d) 105% 84% 80% 84%
Net assets at end of period (in 000's) $12,081 $12,355 $14,004 $14,449 $10,573 $5,967
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges. Class I is not subject to sales
charges.
(c) Total return is not annualized.
(d) The portfolio turnover rate not including mortgage dollar rolls for the year ended October
31, 2006 is 66%.
</Table>
30 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
-------------------------------------------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH
YEAR ENDED YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
$ 8.89 $ 8.78 $ 8.99 $ 8.75 $ 7.95 $ 8.20
------- ------- ------- ------- ----------- ------------
0.38 0.34 0.32 0.33 0.34 0.49
0.20 0.18 (0.25) 0.39 0.86 (0.03)
(0.04) (0.01) 0.04 (0.06) 0.01 (0.15)
------- ------- ------- ------- ------- -------
0.54 0.51 0.11 0.66 1.21 0.31
------- ------- ------- ------- ----------- ------------
(0.44) (0.40) (0.32) (0.42) (0.34) (0.42)
-- -- -- -- (0.07) (0.14)
------- ------- ------- ------- ----------- ------------
(0.44) (0.40) (0.32) (0.42) (0.41) (0.56)
------- ------- ------- ------- ----------- ------------
$ 8.99 $ 8.89 $ 8.78 $ 8.99 $ 8.75 $ 7.95
======= ======= ======= ======= =========== ============
6.23% 6.01% 1.23% 7.68% 15.55%(c) 3.99%
4.26% 3.85% 3.57% 3.73% 4.84%+ 6.20%
2.05% 2.05% 2.09% 2.16% 2.21%+ 2.24%
2.13% 2.21% 2.15% 2.16% 2.21%+ 2.24%
64% 87%(d) 105% 84% 80% 84%
$28,069 $34,148 $71,515 $77,933 $73,799 $55,842
</Table>
<Table>
<Caption>
CLASS I
-----------------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2007 2006 2005 2004
$ 8.91 $ 8.81 $ 9.02 $ 8.96
------ ------ ------ -----------
0.48 0.43 0.42 0.33
0.21 0.18 (0.25) 0.16
(0.04) (0.01) 0.04 (0.02)
------ ------ ------ -----------
0.65 0.60 0.21 0.47
------ ------ ------ -----------
(0.54) (0.50) (0.42) (0.41)
-- -- -- --
------ ------ ------ -----------
(0.54) (0.50) (0.42) (0.41)
------ ------ ------ -----------
$ 9.02 $ 8.91 $ 8.81 $ 9.02
====== ====== ====== ===========
7.50% 7.09% 2.32% 5.44%(c)
5.37% 4.94% 4.69% 4.77%+
0.96% 0.96% 0.97% 1.12%+
1.04% 1.12% 1.03% 1.12%+
64% 87%(d) 1.05% 84%
$ 262 $ 199 $ 232 $ 72
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 31
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises nineteen funds (collectively referred to as the
"Funds"). These financial statements and notes relate only to MainStay
Diversified Income Fund (the "Fund"), a diversified fund.
The Fund currently offers four classes of shares. Class A shares and Class B
shares commenced on February 28, 1997. Class C shares commenced on September 1,
1998. Class I shares commenced on January 2, 2004. Class A shares are offered at
net asset value per share plus an initial sales charge. No sales charge applies
on investments of $1 million or more (and certain other qualified purchases) in
Class A shares, but a contingent deferred sales charge is imposed on certain
redemptions of such shares within one year of the date of purchase. Class B
shares and Class C shares are offered without an initial sales charge, although
a declining contingent deferred sales charge may be imposed on redemptions made
within up to six years of purchase of Class B shares and a 1% contingent
deferred sales charge may be imposed on redemptions made within one year of
purchase of Class C shares. Class I shares are not subject to a sales charge. As
approved by the Board of Trustees in 1997, Class B shares convert to Class A
shares eight years after the date they were purchased. The four classes of
shares bear the same voting (except for issues that relate solely to one class),
dividend, liquidation and other rights and conditions except that Class B and
Class C shares are subject to higher distribution fee rates than Class A shares
under a distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I
shares are not subject to a distribution or service fee.
The Fund's investment objective is to provide current income and competitive
overall return by investing primarily in domestic and foreign debt securities.
The Fund invests in high yield securities (sometimes called "junk bonds"), which
are generally considered speculative because they present a greater risk of
loss, including default, than higher quality debt securities. These securities
pay a premium--a high interest rate or yield--because of the increased risk of
loss. These securities can also be subject to greater price volatility.
The Fund invests in foreign securities, which carry certain risks that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country, industry or region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent or brokers selected by the Fund's Manager, as defined in Note 3,
whose prices reflect broker/dealer supplied valuations and electronic data
processing techniques, if such prices are deemed by the Fund's Manager to be
representative of market values, at the regular close of trading of the New York
Stock Exchange (generally 4:00 p.m. Eastern time) on each day the Fund is open
for business.
Equity securities are valued at the latest quoted sales prices as of the close
of trading on the New York Stock Exchange on each day the Fund is open for
business ("valuation date"). Securities that are not traded on the valuation
date are valued at the mean of the latest quoted bid and asked prices. Prices
normally are taken from the principal market in which each security trades.
Options contracts are valued at the last posted settlement price on the market
where such options are principally traded. Investments in mutual funds are
valued at their net asset value as of the close of the New York Stock Exchange
on the date of valuation.
Foreign currency forward contracts are valued at their fair market values
determined on the basis of the mean between the last current bid and ask prices
based on dealer or exchange quotations.
Loans are valued at the average of bid quotations obtained from a pricing
service. The Trust has engaged an independent pricing service to provide market
value quotations from dealers in loans. As of October 31, 2007, 100% of total
investments in loans were valued based on prices from such services.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity
32 MainStay Diversified Income Fund
and non-equity securities which may be valued in this manner include, but are
not limited to: a security the trading for which has been halted or suspended; a
debt security that has recently gone into default and for which there is not a
current market quotation; a security of an issuer that has entered into a
restructuring; a security that has been de-listed from a national exchange; a
security the market price of which is not available from an independent pricing
source or, if so provided, does not, in the opinion of the Fund's investment
adviser or sub-adviser (if applicable), reflect the security's market value; a
security where the trading on that security's principal market is temporarily
closed at a time when, under normal conditions, it would be open. At October 31,
2007, the Fund held securities with a value of $455,547 that were valued in such
a manner.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. These events may include, but are not limited to, situations
relating to a single issue in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. Should the
Manager or Subadvisor, as defined in Note 3, conclude that such events may have
effected the accuracy of the last price reported on the local foreign market,
the Manager or Subadvisor may, pursuant to procedures adopted by the Fund,
adjust the value of the local price to reflect the impact on the price of such
securities as a result of such events. Additionally, international equity
securities are also fair valued whenever the movement of a particular index
exceeds certain thresholds. In such cases, the securities are fair valued by
applying factors provided by a third party vendor in accordance with the Fund's
policies and procedures.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
of net investment income monthly and distributions of net realized capital and
currency gains, if any, annually. All dividends and distributions are reinvested
in shares of the Fund, at net asset value, unless the shareholder elects
otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America. Permanent
book/tax differences relating to income and gains are reclassified amongst
undistributed net investment income, accumulated net realized gain or loss and
paid-in-capital.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities
purchased, other than short-term securities, for the Fund are accreted and
amortized, respectively, on the constant yield method over the life of the
respective securities or, in the case of a callable security, over the period to
the first date of call. Discounts and premiums on short-term securities are
accreted and amortized, respectively, on the straight line method. Income from
payment-in-kind securities is recorded daily based on the effective interest
method of accrual.
The investment income and realized and unrealized gains and losses on
investments of the Fund are allocated to separate classes of shares based upon
their relative net assets on the date the income is earned or realized and
unrealized gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B) on
page 36) are allocated to separate classes of shares pro rata based upon their
relative net assets value on the date the expenses are incurred. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. Premiums are received
and are recorded as liabilities. The liabilities are subsequently adjusted and
unrealized appreciation or depreciation is recorded to reflect the current value
of the options written. Premiums received from writing options which expire are
treated as realized gains. Premiums received from writing options which are
exercised or are canceled in closing
www.mainstayfunds.com 33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
purchase transactions are added to the proceeds or netted against the amount
paid on the transaction to determine the realized gain or loss. By writing a
covered call option, in exchange for the premium, the Fund foregoes the
opportunity for capital appreciation above the exercise price should the price
of the underlying security or foreign currency increase. By writing a covered
put option, the Fund, in exchange for the premium, accepts the risk of a decline
in the market value of the underlying security or foreign currency below the
exercise price. A call option may be covered by the call writer's owning the
underlying security throughout the option period. A call option may also be
covered by the call writer's maintaining liquid assets valued at greater than
the exercise price of the call written. When writing a covered call option, the
Fund, in return for the premium on the option, gives up the opportunity to
profit from a price increase in the underlying securities above the exercise
price, but, as long as the obligation as the writer continues, has retained the
risk of loss should the price of the underlying security decline. After writing
a put option, the Fund may incur a loss equal to the difference between the
exercise price of the option and the sum of the market value of the underlying
security plus the premium received from the sale of the option.
The Fund may purchase call and put options on its portfolio securities. The Fund
may purchase call options to protect against an increase in the price of the
security it anticipates purchasing. The Fund may purchase put options on its
securities to protect against a decline in the value of the security or to close
out covered written put positions. The Fund may also purchase options to seek to
enhance returns. Risks may arise from an imperfect correlation between the
change in market value of the securities held by the Fund and the prices of
options relating to the securities purchased or sold by the Fund and from the
possible lack of a liquid secondary market for an option. The maximum exposure
to loss for any purchased option is limited to the premium initially paid for
the option.
(H) LOAN ASSIGNMENTS, PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan
assignments and loan participations. Loan assignments and participations are
agreements to make money available (a "commitment") to a borrower in a specified
amount, at a specified rate and within a specified time. Such loan assignments
and participations are typically senior, secured and collateralized in nature.
The Fund records an investment when the borrower withdraws money and records
interest as earned. These loans pay interest at rates which are periodically
reset by reference to a base lending rate plus a spread. These base lending
rates are generally the prime rate offered by a designated U.S. bank or London
InterBank Offered Rate ("LIBOR").
The loans in which the Fund invests are generally readily marketable, but may be
subject to some restrictions on resale. For example, the Fund may be
contractually obligated to receive approval from the agent bank and/or borrower
prior to the sale of these investments.
The Fund assumes the credit risk of the borrower, the selling participant and
any other persons interpositioned between the Fund and the borrower
("intermediate participants"). In the event that the borrower, selling
participant or intermediate participants becomes insolvent or enters into
bankruptcy, the Fund may incur certain costs and delays in realizing payment, or
may suffer a loss of principal and/or interest.
Unfunded commitments represent the remaining obligation of the Fund to the
borrower. At any point in time, up to the maturity date of the issue, the
borrower may demand the unfunded portion. These unfunded amounts are recorded in
memorandum accounts.
(I) FOREIGN CURRENCY FORWARD CONTRACTS. A foreign currency forward contract is
an agreement to buy or sell currencies of different countries on a specified
future date at a specified rate. During the period the forward contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" such contract on a daily basis to reflect the
market value of the contract at the end of each day's trading. When the forward
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Fund's basis in the contract. The Fund enters into foreign currency forward
contracts primarily to hedge its foreign currency denominated investments and
receivables and payables against adverse movements in future foreign exchange
rates or to try to enhance the Fund's returns.
The use of foreign currency forward contracts involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities. The contract amount reflects the extent of the Fund's
involvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. The
unrealized appreciation on forward contracts reflects the Fund's exposure at
period end to credit loss in the event of a counterparty's failure to perform
its obligations. (See Note 5 on page 38.)
(J) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Prices of securities denominated in foreign currency amounts
are translated into U.S. dollars at the mean between the buying and selling
rates last quoted by any major U.S. bank at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date,
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
34 MainStay Diversified Income Fund
The assets and liabilities are presented at the exchange rates and market values
at the close of the period. The realized and unrealized changes in net assets
arising from fluctuations in exchange rates and market prices of securities are
not separately presented.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains or losses
realized as a result of differences between the amounts of securities sale
proceeds or purchase cost, dividends, interest and withholding taxes as recorded
on the Fund's books, and the U.S. dollar equivalent amount actually received or
paid. Net currency gains or losses from valuing such foreign currency
denominated assets and liabilities, other than investments at valuation date
exchange rates, are reflected in unrealized foreign exchange gains or losses.
(K) MORTGAGE DOLLAR ROLLS. The Fund enters into mortgage dollar roll ("MDR")
transactions in which it sells mortgage-backed securities ("MBS") from its
portfolio to a counterparty from whom it simultaneously agrees to buy a similar
security on a delayed delivery basis. The MDR transactions of the Fund are
classified as purchase and sale transactions. The securities sold in connection
with the MDRs are removed from the portfolio and a realized gain or loss is
recognized. The securities the Fund has agreed to acquire are included at market
value in the Portfolio of Investments and liabilities for such purchase
commitments are included as payables for investments purchased. During the roll
period, the Fund forgoes principal and interest paid on the securities. The Fund
is compensated by the difference between the current sales price and the forward
price for the future as well as by the earnings on the cash proceeds of the
initial sale. MDRs may be renewed without physical delivery of the securities
subject to the contract. The Fund maintains liquid assets from its portfolio
having a value not less than the repurchase price, including accrued interest.
MDR transactions involve certain risks, including the risk that the MBS returned
to the Fund at the end of the roll, while substantially similar, could be
inferior to what was initially sold to the counterparty.
(L) SECURITIES LENDING. In order to realize additional income the Fund may lend
its securities to broker-dealers and financial institutions. The loans are
collateralized by cash or securities at least equal at all times to the market
value of the securities loaned. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. The Fund may bear
the risk of delay in recovery of, or loss of rights in, the securities loaned
should the borrower of the securities experience financial difficulty. The Fund
receives compensation for lending its securities in the form of fees or it
retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(M) RESTRICTED SECURITIES. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933. The Fund may not
have the right to demand that such securities be registered. Disposal of these
securities may involve time-consuming negotiations and expenses and it may be
difficult to obtain a prompt sale at an acceptable price. (See Note 5 on page
38.)
(N) INDEMNIFICATIONS. In the normal course of business, the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote.
However, there can be no assurance that material liabilities related to such
obligations will not arise in the future which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager") a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. NYLIM provides offices and conducts clerical, recordkeeping and
bookkeeping services, and is responsible for the financial and accounting
records required to be maintained by the Fund. NYLIM also pays the salaries and
expenses of all personnel affiliated with the Fund and all the operational
expenses that are not the responsibility of the Fund. MacKay Shields LLC (the
"Subadvisor"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life, serves as subadvisor to the Fund and is responsible
for the day-to-day portfolio management of the Fund. Pursuant to the terms of a
Subadvisory Agreement between NYLIM and the Subadvisor, NYLIM pays for the
services of the Subadvisor.
The Fund is contractually obligated to pay NYLIM a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.60% on assets up to $500 million and 0.55% on assets in
excess of $500 million.
Effective March 1, 2007, NYLIM has entered into a written expense limitation
agreement under which it has agreed to waive a portion of the Fund's management
fee or
www.mainstayfunds.com 35
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
reimburse the expenses of the appropriate class of the Fund so that the class'
total ordinary operating expenses (total annual operating expenses excluding
taxes, interest, litigation, extraordinary expenses, and brokerage and other
transaction expenses relating to the purchase or sale of portfolio investments)
do not exceed the following amounts of average daily net assets for each class:
Class A, 1.30%; Class B, 2.05%; Class C, 2.05%; and Class I, 0.96%. This expense
limitation may be modified or terminated only with the approval of the Board of
Trustees. NYLIM may recoup the amount of any management fee waivers or expense
reimbursements from the Fund pursuant to the agreement if such action does not
cause the Fund to exceed existing expense limitations and the recoupment is made
within three years after the year in which NYLIM incurred the expense.
For the year ended October 31, 2007, NYLIM earned fees from the Fund in the
amount of $665,009 and waived its fees in the amount of $93,916.
As of October 31, 2007, the amounts of waived fees that are subject to possible
recoupment by NYLIM, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 2010 TOTAL
$19,479 $ 190,789 $93,916 $304,184
- -----------------------------------------------------------------------------------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Prior to March 1, 2007, the Manager had an agreement in place under which it had
agreed to waive a portion of the Fund's management fee or reimburse the expenses
of the Fund so that the Fund's total ordinary operating expenses did not exceed
1.30% of the Fund's average daily net assets for its Class A shares. NYLIM also
applied an equivalent waiver or reimbursement, in an equal amount of basis
points, to the other share classes of the Fund.
State Street Bank & Trust Company ("SSBT"), One Lincoln Street, Boston,
Massachusetts, 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with NYLIM. These services include calculating
daily net asset values of the Fund, maintaining general ledger and sub-ledger
accounts for the calculation of the Fund's respective net asset values, and
assisting NYLIM in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, SSBT is compensated by
NYLIM.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, other than Class I shares, has adopted distribution plans
(the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940
Act.
Pursuant to the Class A Plan, the Distributor receives a monthly distribution
fee from the Fund at an annual rate of 0.25% of the average daily net assets of
the Fund's Class A shares, which is an expense of the Class A shares of the Fund
for distribution or service activities as designated by the Distributor.
Pursuant to the Class B and Class C Plans, the Fund pays the Distributor a
monthly distribution fee, which is an expense of the Class B and Class C shares
of the Fund, at the annual rate of 0.75% of the average daily net assets of the
Fund's Class B and Class C shares. The Plans provide that the Class B and Class
C shares of the Fund also incur a service fee at the annual rate of 0.25% of the
average daily net asset value of the Class B and Class C shares of the Fund.
Class I shares are not subject to a distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $18,149 for the year ended
October 31, 2007. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $497, $47,296, and $2,601, respectively, for the year ended October
31, 2007.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund, for the year ended October 31, 2007,
amounted to $289,719.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts, effective March 1, 2007. Shareholders with an account
balance of less than $1,000 are charged an annual per account fee of $20
(assessed semi-annually).
(F) CAPITAL. At October 31, 2007, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $8,652,415 12.6%
- ----------------------------------------------------------
Class C 113 0.0*
- ----------------------------------------------------------
Class I 1,189 0.5
- ----------------------------------------------------------
</Table>
* Less than one-tenth of a percent.
36 MainStay Diversified Income Fund
(G) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2007, these fees, which are included in professional fees
shown on the Statement of Operations, were $4,107.
The Fund pays the Manager a monthly fee for certain pricing and recordkeeping
services provided under the Accounting Agreement at the annual rate of 1/20 of
1% for the first $20 million of average monthly net assets, 1/30 of 1% of the
next $80 million of average monthly net assets and 1/100 of 1% of any amount in
excess of $100 million of average monthly net assets. Fees for these services
provided to the Fund by the Manager amounted to $37,750 for the year ended
October 31, 2007.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2007, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$ 132,785 $(4,317,631) $(119,578) $3,251,739 $(1,052,685)
--------------------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals, straddle loss deferrals, and mark to
market on foreign currency forward contracts.
The other temporary differences are primarily due to distribution payables and
interest on defaulted securities.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income, accumulated net realized loss
on investments and additional paid-in capital, arising from permanent
differences; net assets at October 31, 2007 are not affected.
<Table>
<Caption>
ACCUMULATED NET
ACCUMULATED NET REALIZED GAIN (LOSS) ADDITIONAL
INVESTMENT INCOME (LOSS) ON INVESTMENTS PAID-IN CAPITAL
$1,104,022 $(1,104,022) $ --
-----------------------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to foreign currency gain
(loss), prior year post financial adjustments, straddles, reclassification of
consent payment and paydown gain (loss).
At October 31, 2007, for federal income tax purposes, capital loss carryforwards
of $4,317,631 were available as shown in the table below, to the extent provided
by the regulations to offset future realized gains of the Fund through the years
indicated. To the extent that these loss carryforwards are used to offset future
capital gains, it is probable that the capital gains so offset will not be
distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
2008 $ 319
2009 864
2010 1,161
2011 524
2014 1,450
-------------------------------------------
$4,318
-------------------------------------------
</Table>
The Fund utilized $1,003,149 of capital loss carryforwards during the year ended
October 31, 2007.
The tax character of distributions paid during the years ended October 31, 2007
and October 31, 2006, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2007 2006
Distributions paid from:
Ordinary Income $5,949,974 $5,818,551
- -----------------------------------------------------------
</Table>
www.mainstayfunds.com 37
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--FOREIGN CURRENCY FORWARD CONTRACTS AND RESTRICTED SECURITIES:
Foreign currency forward contracts open at October 31, 2007:
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
PURCHASED SOLD (DEPRECIATION)
Foreign Currency Buy Contracts
- ---------------------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 11/6/07 E 1,344,100 $1,846,336 $ 100,786
- ---------------------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 11/19/07 E 159,974 227,419 4,375
- ---------------------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 12/6/07 E 1,344,100 1,934,294 13,734
- ---------------------------------------------------------------------------------------------------------------------
Pound Sterling vs. U.S. Dollar, expiring 11/6/07 L 105,000 213,413 4,887
- ---------------------------------------------------------------------------------------------------------------------
Pound Sterling vs. U.S. Dollar, expiring 12/6/07 L 105,000 215,093 3,004
- ---------------------------------------------------------------------------------------------------------------------
Pound Sterling vs. U.S. Dollar, expiring 12/11/07 L 494,139 1,010,761 15,451
- ---------------------------------------------------------------------------------------------------------------------
Philippines Peso vs. U.S. Dollar, expiring 11/5/07 PHP 5,720,000 125,000 5,952
- ---------------------------------------------------------------------------------------------------------------------
Philippines Peso vs. U.S. Dollar, expiring 2/5/07 PHP 5,720,000 130,863 (418)
- ---------------------------------------------------------------------------------------------------------------------
Russian Rouble vs. U.S. Dollar, expiring 11/1/07 RUB 6,237,700 245,000 8,077
- ---------------------------------------------------------------------------------------------------------------------
Turkish Lira vs. U.S. Dollar, expiring 11/5/07 TRY 164,938 125,000 16,263
- ---------------------------------------------------------------------------------------------------------------------
Turkish Lira vs. U.S. Dollar, expiring 2/5/08 TRY 164,938 134,698 2,586
- ---------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
CONTRACT CONTRACT
AMOUNT AMOUNT
SOLD PURCHASED
Foreign Currency Sale Contracts
- ---------------------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 11/6/07 E 1,344,100 $1,933,488 (13,635)
- ---------------------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 11/19/07 E 2,981,660 4,240,129 (80,148)
- ---------------------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 11/23/07 E 1,690,156 2,417,668 (31,444)
- ---------------------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 11/26/07 E 2,125,013 3,026,784 (52,605)
- ---------------------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 12/11/07 E 1,391,204 1,920,000 (96,385)
- ---------------------------------------------------------------------------------------------------------------------
Pound Sterling vs. U.S. Dollar, expiring 11/6/07 L 105,000 215,303 (2,997)
- ---------------------------------------------------------------------------------------------------------------------
Pound Sterling vs. U.S. Dollar, expiring 11/19/07 L 994,862 2,020,862 (46,673)
- ---------------------------------------------------------------------------------------------------------------------
Pound Sterling vs. U.S. Dollar, expiring 12/11/07 L 1,088,408 2,200,000 (60,372)
- ---------------------------------------------------------------------------------------------------------------------
Philippines Peso vs. U.S. Dollar, expiring 11/5/07 PHP 5,720,000 130,385 (567)
- ---------------------------------------------------------------------------------------------------------------------
Russian Rouble vs. U.S. Dollar, expiring 11/1/07 RUB 6,237,700 242,006 (11,071)
- ---------------------------------------------------------------------------------------------------------------------
Turkish Lira vs. U.S. Dollar, expiring 11/5/07 TRY 164,938 138,487 (2,776)
- ---------------------------------------------------------------------------------------------------------------------
Unrealized depreciation on foreign currency forward
contracts $ (220,666)
- ---------------------------------------------------------------------------------------------------------------------
</Table>
Foreign currency held at October 31, 2007:
<Table>
<Caption>
CURRENCY COST VALUE
Argentinian Peso ARS 28,422 $ 9,209 $ 9,048
Australian Dollar A$ 937 832 873
Egyptian Pound EGP 1,044 181 189
Euro E 23,954 34,287 34,699
- -----------------------------------------------------------------------------
$44,509 $44,809
- -----------------------------------------------------------------------------
</Table>
38 MainStay Diversified Income Fund
Restricted securities held at October 31, 2007:
<Table>
<Caption>
SHARES/
DATE(S) OF NUMBER OF 10/31/07 PERCENTAGE OF
SECURITY ACQUISITION WARRANTS COST VALUE NET ASSETS
At Home Corp. 7/25/01 504,238 $ 7,704 $ 50 0.0%(a)
- ---------------------------------------------------------------------------------------------------------------------------------
Haights Cross Communications, Inc.
Common Stock 8/31/07 15,988 181,730 154,284 0.1
Warrants 8/31/07 223 26 2,150 0.0(a)
- ---------------------------------------------------------------------------------------------------------------------------------
Neon Communications Group, Inc. 6/21/01-4/11/06 37,056 20,317 162,213 0.1
- ---------------------------------------------------------------------------------------------------------------------------------
North Atlantic Trading Co., Inc.
Common Stock 4/21/04 522 5 5 0.0(a)
- ---------------------------------------------------------------------------------------------------------------------------------
QuadraMed Corp.
Convertible Preferred Stock 6/16/04 10,400 253,700 244,400 0.2
- ---------------------------------------------------------------------------------------------------------------------------------
$463,482 $563,102 0.4%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
(a) Less than one-tenth of a percent.
NOTE 6--CUSTODIAN:
SSBT is the custodian of cash and securities of the Fund. Custodial fees are
charged to the Fund based on the market value of securities in the Fund and the
number of certain cash transactions incurred by the Fund.
NOTE 7--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. These funds pay a commitment fee, at an annual rate of .060% of the
average commitment amount, regardless of usage, to The Bank of New York, which
acts as agent to the syndicate. Such commitment fees are allocated among the
funds based upon net assets and other factors. Interest on any revolving credit
loan is charged based upon the Federal Funds Advances rate. There were no
borrowings made or outstanding on the line of credit during the year ended
October 31, 2007.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2007, purchases and sales of U.S. Government
securities were $27,461 and $32,213, respectively. Purchases and sales of
securities, other than U.S. Government securities and short-term securities,
were $40,083 and $42,968, respectively.
NOTE 9--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 1,150 $ 10,304
Shares issued to shareholders in
reinvestment of dividends: 327 2,929
Shares redeemed (1,647) (14,792)
-----------------------
Net decrease in shares outstanding
before conversion (170) (1,559)
Shares converted from Class B (See Note
1) 427 3,826
-----------------------
Net increase 257 $ 2,267
=======================
Year ended October 31, 2006:
Shares sold 1,456 $ 12,780
Shares issued to shareholders in
reinvestment of dividends: 265 2,327
Shares redeemed (1,764) (15,515)
-----------------------
Net decrease in shares outstanding
before conversion (43) (408)
Shares converted from Class B (See Note
1) 2,848 25,064
-----------------------
Net increase 2,805 $ 24,656
=======================
</Table>
www.mainstayfunds.com 39
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 414 $ 3,701
Shares issued to shareholders in
reinvestment of dividends: 128 1,139
Shares redeemed (835) (7,460)
--------------------
Net decrease in shares outstanding
before conversion (293) (2,620)
Shares reacquired upon conversion into
Class A (See Note 1) (428) (3,826)
--------------------
Net decrease (721) $ (6,446)
====================
Year ended October 31, 2006:
Shares sold 490 $ 4,302
Shares issued to shareholders in
reinvestment of dividends: 163 1,426
Shares redeemed (2,096) (18,358)
--------------------
Net decrease in shares outstanding
before conversion (1,443) (12,630)
Shares reacquired upon conversion into
Class A (See Note 1) (2,855) (25,064)
--------------------
Net decrease (4,298) $(37,694)
====================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 1,011 $ 8,957
Shares issued to shareholders in
reinvestment of dividends: 48 425
Shares redeemed (1,105) (9,869)
--------------------
Net decrease (46) $ (487)
====================
Year ended October 31, 2006:
Shares sold 325 $ 2,861
Shares issued to shareholders in
reinvestment of dividends: 39 341
Shares redeemed (569) (4,993)
--------------------
Net decrease (205) $(1,791)
====================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 8 $ 76
Shares issued to shareholders in
reinvestment of dividends: 2 13
Shares redeemed (3) (29)
------------------
Net increase 7 $ 60
==================
Year ended October 31, 2006:
Shares sold 4 $ 30
Shares issued to shareholders in
reinvestment of dividends: 1 12
Shares redeemed (9) (77)
------------------
Net decrease (4) $ (35)
==================
</Table>
NOTE 10--OTHER MATTERS:
In 2004 the Securities and Exchange Commission ("SEC") raised concerns relating
to a guarantee provided to shareholders of the MainStay Equity Index Fund and
the fees and expenses of that Fund as well as the related guarantee disclosure
to that fund's shareholders. Discussions have been held with the SEC concerning
a possible resolution of this matter. There can be no assurance of the outcome
of these efforts.
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS:
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation becomes effective for the Fund's 2008 fiscal
year, and is to be applied to all open tax years as of the date of
effectiveness. Based on Management's analysis, the determination has been made
that the adoption of the interpretation on November 1, 2007, did not have an
impact on the Fund's financial statements upon adoption. Management continually
reviews the Fund's tax positions and such conclusions under the Interpretation
based on factors, including, but not limited to, ongoing analyses of tax laws,
regulations and interpretations, thereof.
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The changes to current generally accepted accounting
principles from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures
about fair value measurements. As of October 31, 2007, the Fund does not believe
the adoption of SFAS No. 157 will impact the amounts reported in the Fund's
financial statements. However, additional disclosures may be required about the
inputs used to develop the measurements and the effect of certain measurements
reported in the financial statements for a fiscal period.
40 MainStay Diversified Income Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Diversified Income Fund ("the
Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2007, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years or periods in the
four-year period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits. The financial highlights for the periods presented through
October 31, 2003, were audited by other auditors, whose report dated December
18, 2003, expressed an unqualified opinion thereon.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2007, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Diversified Income Fund of The MainStay Funds as of October 31, 2007,
the results of its operations for the year then ended, the changes in its net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years or periods in the four-year period
then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 20, 2007
www.mainstayfunds.com 41
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with New York Life Investment Management LLC (the "Manager") and the
Subadvisory Agreement between the Manager and MacKay Shields LLC, a wholly-owned
indirect subsidiary of New York Life Investment Management Holdings LLC, an
affiliate of the Manager, (the "Subadvisor"), (each an "Agreement") at a meeting
held on May 22 and 23, 2007. In connection with the approval of each Agreement,
the Trustees reviewed a significant amount of a wide variety of information that
they had requested and received from the Manager and the Subadvisor, and data
and analysis from an outside data provider and a third party consultant. The
Trustees considered various industry trends and regulatory developments in their
deliberations. In considering approval of each Agreement, and in evaluating the
fairness of the compensation to be paid by the Fund, the Trustees met both as a
full Board and in executive session with no Interested Trustee present, in
advance of the meeting at which the Agreements were approved, and they
considered a number of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and the Subadvisor have provided historically to the Fund, and
also generally to other series of the Trust. Among other services, the Manager's
services have included investment management services, including monitoring and
evaluating the Subadvisor's investment program and investment results with
respect to the Fund, and the Subadvisor's compliance with the Fund's investment
policies and restrictions, and administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets,
and its other services include, among other services, providing reports to the
Manager and reviewing certain aspects of Fund filings. The Trustees considered,
among other things, the Manager's and Subadvisor's management, personnel,
resources, operations and portfolio management capabilities. The Board reviewed
reports on the Subadvisor's brokerage practices, including with respect to best
execution of portfolio trades. The Trustees considered the Manager's supervision
of the Fund's service providers and its attention to the compliance program of
the Trust, the Manager, the Subadvisor and certain other service providers, as
well as the Subadvisor's attention to its compliance program. The Trustees noted
the generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's generally mid-range
recent investment performance and its underperformance relative to peer funds
over the longer term.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information that indicated that the profitability to the Manager and its
affiliates from the Management Agreement with respect to the Fund and from the
overall relationship with the Trust was low. The Trustees considered other
benefits that the Manager and its affiliates receive from the relationship with
the Trust, including benefits that NYLIFE Distributors and MainStay Shareholder
Services receive in exchange for services they provide to the Funds, and certain
benefits from soft dollar arrangements. The Trustees acknowledged certain
benefits to the reputation of the Manager and the Trust from their association
with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They considered that, across the Trust
(though not every series or share class), gross transfer agency fees tended to
be relatively high and, therefore, adversely affected gross expense ratios.
Noting that the Trust historically permitted smaller investor accounts, the
Trustees considered measures that had been recently implemented that were
intended to increase the average size of shareholder accounts, including
generally higher investment minimums, and small account fees, and the Trustees
considered potential benefits to the Manager and its affiliates arising from
such measures.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the
42 MainStay Diversified Income Fund
Fund's assets, or the assets of the Trust overall, increase. The Trustees noted,
in particular, the plans of the Manager and its affiliates for marketing and
distributing the shares of the various series of the Trust. They noted the
Manager's willingness to implement a contractual breakpoint that would reduce
the Fund's management fee at asset levels above the breakpoint, and the fact
that the breakpoint was intended to provide that shareholders would share in
benefits from economies of scale obtained through the growth in the Fund's
assets. The Trustees noted that the Fund not reached the asset level at which
the breakpoint would reduce the Fund's management fee rate. The Trustees
reviewed information about the potential effect of asset growth on Fund
expenses, the difficulty of forecasting its effect on the profitability of the
Manager and its affiliates, and the management fee breakpoints applicable to the
Fund and certain other funds.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by the
Fund, the Trustees evaluated factors such as the fees and expenses borne by
other registered funds in the market pursuing strategies generally similar to
the Fund's. The Trustees considered that comparative data with respect to other
clients of the Manager or Subadvisor was not available as such clients did not
have similar investment mandates as the Fund. The Trustees considered the
current and proposed contractual and net management fees, its anticipated
expense ratio, and various components of the expense ratio, in comparison to
other funds in comparison groupings. The Trustees generally acknowledged the
historical relationships among the Manager, the Subadvisor and the Trust and the
likely difficulties in implementing an alternative to the investment management
arrangement between the Trust and the Manager. The Trustees noted the Manager's
agreement to maintain a limit on the Fund's net expenses at a certain level.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings, with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. This summary set out
above describes the most important, but not all, of the factors considered by
the Trustees in considering each Agreement. On the basis of their review, a
majority of the Trustees and a majority of the Non-Interested Trustees concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the judgment of a
majority of the Trustees and a majority of the Non-Interested Trustees that
approval of each Agreement was in the best interests of the Fund and its
shareholders.
www.mainstayfunds.com 43
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2007,
should be multiplied by 0.4% to arrive at the amount eligible for qualified
dividend income, 57.6% for qualified interest income and 0.4% for the corporate
dividends received deduction.
In January 2008, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2007. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2007.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
or (iii) on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 1-800-MAINSTAY (1-800-624-6782). You also can obtain and review copies
of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC
(information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330).
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of The MainStay Funds (the
"Trust") was held on May 4, 2007, at the offices of New York Life Investment
Management LLC in Parsippany, New Jersey. The purpose of the meeting was to
elect the following individuals to the Board of Trustees of the Trust:
- Susan B. Kerley
- Alan R. Latshaw
- Peter Meenan
- Richard H. Nolan, Jr.
- Richard S. Trutanic
- Roman L. Weil
- John A. Weisser
- Brian A. Murdock (Interested Trustee)
There are no other Trustees of the Trust.
No other business came before the special meeting. The proposal to elect
Trustees was passed by the shareholders of the Fund as shown below:
<Table>
<Caption>
DIVERSIFIED VOTES VOTES
INCOME FUND FOR WITHHELD ABSTENTIONS TOTAL
Susan B. Kerley 7,215,258.615 29,595.044 12,777.000 7,257,630.659
- -----------------------------------------------------------------------------------
Alan R. Latshaw 7,215,510.329 29,343.330 12,777.000 7,257,630.659
- -----------------------------------------------------------------------------------
Peter Meenan 7,215,258.615 29,595.044 12,777.000 7,257,630.659
- -----------------------------------------------------------------------------------
Richard H. Nolan, Jr. 7,215,510.329 29,343.330 12,777.000 7,257,630.659
- -----------------------------------------------------------------------------------
Richard S. Trutanic 7,215,510.329 29,343.330 12,777.000 7,257,630.659
- -----------------------------------------------------------------------------------
Roman L. Weil 7,215,510.329 29,343.330 12,777.000 7,257,630.659
- -----------------------------------------------------------------------------------
John A. Weisser 7,215,258.615 29,595.044 12,777.000 7,257,630.659
- -----------------------------------------------------------------------------------
Brian A. Murdock 7,215,510.329 29,343.330 12,777.000 7,257,630.659
- -----------------------------------------------------------------------------------
</Table>
This resulted in approval of the proposal.
44 MainStay Diversified Income Fund
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Pursuant to
notice, a Special Meeting of Shareholders of the Trust was held on May 4, 2007,
at NYLIM's offices in Parsippany, New Jersey. The Trustees listed below were
elected to serve the Trust effective June 7, 2007.
Each Trustee serves until his or her successor is elected and qualified or until
his or her resignation, death or removal. The Retirement Policy provides that a
Trustee shall tender his or her resignation upon reaching age 72. A Trustee
reaching the age of 72 may continue for additional one-year periods with the
approval of the Board's Nominating and Governance Committee, except that no
Trustee shall serve on the Board past his or her 75th birthday. Officers serve a
term of one year and are elected annually by the Trustees. The business address
of each Trustee and officer listed below is 51 Madison Avenue, New York, New
York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF FUNDS
POSITION(S) HELD IN FUND COMPLEX
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
BRIAN A. MURDOCK Indefinite; Member of the Board of Managers 73 Trustee, Eclipse Funds since
3/14/56 Trustee and Chief and President (since 2004) and June, 2007 (3 funds); Director,
Executive Officer Chief Executive Officer (since Eclipse Funds Inc. since June
since 2006 2006), New York Life Investment 2007 (22 funds); Director,
Management LLC and New York MainStay VP Series Fund, Inc.,
Life Investment Management since 2006 (24 portfolios);
Holdings LLC; Senior Vice Director, ICAP Funds, Inc.,
President, New York Life since 2006 (3 funds)
Insurance Company (since 2004);
Chairman of the Board and
President, NYLIFE Distributors
LLC (since 2004); Member of the
Board of Managers, NYLCAP
Manager LLC and Madison Capital
Funding LLC (since 2004),
MacKay Shields LLC and
Institutional Capital LLC
(since 2006), and McMorgan &
Company LLC (since 2007); Chief
Executive Officer, Eclipse
Funds and Eclipse Funds Inc.
(since 2006); Chairman (2006 to
2007) and Director and Chief
Executive Officer (since 2006),
MainStay VP Series Fund, Inc.;
Director and Chief Executive
Officer, ICAP Funds, Inc.
(since 2006); Chief Investment
Officer, MLIM Europe and Asia
(2001 to 2003); President of
Merrill Japan and Chairman of
MLIM's Pacific Region (1999 to
2001)
-----------------------------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow Capital
Management, Inc., McMorgan & Company LLC, NYLIFE Securities Inc. and/or NYLIFE
Distributors LLC, as described in detail above in the column "Principal
Occupation(s) During Past Five Years."
www.mainstayfunds.com 45
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. KERLEY Indefinite; Partner, Strategic Management 73 Chairman since 2005 and Trustee
8/12/51 Chairman and Advisors LLC (since 1990) since 2000, Eclipse Funds (3
Trustee since funds); Chairman since 2005 and
June 2007 Director since 1990, Eclipse
Funds Inc. (22 funds); Chairman
and Director, ICAP Funds, Inc.,
since 2006 (3 funds); Chairman
and Director, MainStay VP
Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
Legg Mason Partners Funds,
Inc., since 1991 (30
portfolios)
----------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & Young 73 Trustee, Eclipse Funds since
3/27/51 Trustee and Audit LLP (2002 to 2003); Partner, June 2007 (3 funds); Director,
Committee Arthur Andersen LLP (1989 to Eclipse Funds Inc. since June
Financial Expert 2002); Consultant to the Audit 2007 (22 funds); Director, ICAP
since 2006 and Compliance Committee of The Funds, Inc., since June 2007 (3
MainStay Funds (2004 funds); Director, MainStay VP
to 2006) Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
State Farm Associates Funds
Trusts since 2005 (3
portfolios); Trustee, State
Farm Mutual Fund Trust since
2005 (15 portfolios); Trustee,
State Farm Variable Product
Trust since 2005 (9 portfolios)
----------------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds since
12/5/41 Trustee since President and Chief Executive 2002 (3 funds); Director,
June 2007 Officer, Babson-United, Inc. Eclipse Funds Inc. since 2002
(financial services firm) (2000 (22 funds); Director, ICAP
to 2004); Independent Funds, Inc.,
Consultant (1999 to 2000); Head since 2006 (3 funds); Director,
of Global Funds, Citicorp (1995 MainStay VP Series Fund, Inc.,
to 1999) since June 2007 (24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 73 Trustee, Eclipse Funds since
NOLAN, JR. Trustee since Management; President--Shields/ June 2007 (3 funds); Director,
11/16/46 June 2007 Alliance, Alliance Capital Eclipse Funds Inc. since June
Management (1994 to 2004) 2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 2006
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman (since 1990) and Chief 73 Trustee, Eclipse Funds since
TRUTANIC Trustee since Executive Officer (1990 to June 2007 (3 funds); Director,
2/13/52 1994 1999), Somerset Group Eclipse Funds Inc. since June
(financial advisory firm); 2007 (22 funds); Director, ICAP
Managing Director and Advisor, Funds, Inc., since June 2007 (3
The Carlyle Group (private funds); Director, MainStay VP
investment firm) (2002 to Series Fund, Inc., since June
2004); Senior Managing Director 2007 (24 portfolios)
and Partner, Groupe Arnault
S.A. (private investment firm)
(1999
to 2002)
----------------------------------------------------------------------------------------------------------------------
</Table>
46 MainStay Diversified Income Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEE
ROMAN L. WEIL Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds since
5/22/40 Trustee and Audit Accounting, Graduate School of June 2007 (3 funds); Director,
Committee Business, University of Eclipse Funds Inc. since June
Financial Expert Chicago; President, Roman L. 2007 (22 funds); Director, ICAP
since June 2007 Weil Associates, Inc. Funds, Inc., since June 2007 (3
(consulting firm) funds); Director, MainStay VP
Series Fund, Inc., since 1994
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 73 Trustee, Eclipse Funds since
10/22/41 Trustee since Salomon Brothers, Inc. (1971 to June 2007 (3 funds); Director,
June 2007 1995) Eclipse Funds Inc. since June
2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 1997
(24 portfolios); Trustee,
Direxion Funds (69 funds) and
Direxion Insurance Trust (45
funds) since March 2007
----------------------------------------------------------------------------------------------------------------------
</Table>
Terry L. Lierman resigned as Trustee of the Trust effective May 31, 2007. Edward
J. Hogan, John B. McGuckian and Donald E. Nickelson resigned as Trustees of the
Trust effective June 7, 2007.
At a meeting of the Board of Trustees held on June 7 and 8, 2007, the following
individuals were appointed to serve as Officers of the Trust effective June 7,
2007:
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ROBERT A. Chief Legal Senior Managing Director, General Counsel and Secretary, New
ANSELMI Officer since York Life Investment Management LLC (including predecessor
10/19/46 2004 advisory organizations) (since 2000); Secretary (since 2001)
and General Counsel (since 2004), New York Life Investment
Management Holdings LLC; Senior Vice President, New York
Life Insurance Company (since 2000); Vice President and
Secretary, McMorgan & Company LLC (since 2001); Secretary,
NYLIM Service Company LLC (since 2005), NYLCAP Manager LLC
(since 2004), Madison Capital Funding LLC (since 2002), and
Institutional Capital LLC (since 2006); Chief Legal Officer,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), McMorgan Funds (since 2005) and
ICAP Funds, Inc. (since 2006); Managing Director and Senior
Counsel, Lehman Brothers Inc. (1998 to 1999); General
Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998)
-------------------------------------------------------------------------------------------------
JACK R. Treasurer and Managing Director, New York Life Investment Management LLC
BENINTENDE Principal (since June 2007); Treasurer and Principal Financial and
5/12/64 Financial and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
Accounting MainStay VP Series Fund, Inc., and ICAP Funds, Inc. (since
Officer since June 2007); Vice President, Prudential Investments (2000 to
June 2007 2007); Assistant Treasurer, JennisonDryden Family of Funds,
Target Portfolio Trust, The Prudential Series Fund and
American
Skandia Trust (2006 to 2007); Treasurer and Principal
Financial Officer, The Greater China
Fund (2007)
-------------------------------------------------------------------------------------------------
STEPHEN P. President since Senior Managing Director and Chief Marketing Officer, New
FISHER March 2007 York Life Investment Management LLC (since 2005); Managing
2/22/59 Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since March 2007); Managing Director, UBS
Global Asset Management (1999 to 2003)
-------------------------------------------------------------------------------------------------
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration predecessor advisory organizations) (since 2000); Executive
2/8/59 since 2005 Vice President, New York Life Trust Company (since 2006);
Vice President--Administration, Eclipse Funds, Eclipse Funds
Inc. and MainStay VP Series Fund, Inc. (since 2005) and ICAP
Funds, Inc. (since 2006)
-------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 47
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Senior Managing Director and Chief Compliance Officer (since
MICUCCI President and 2006) and Managing Director and Chief Compliance Officer
12/16/65 Chief Compliance (2003 to 2006), New York Life Investment Management LLC and
Officer since New York Life Investment Management Holdings LLC; Senior
2006 Managing Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE Distributors
LLC; Chief Compliance Officer, NYLCAP Manager LLC (since
2006); Senior Vice President and Chief Compliance Officer,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund,
Inc., and ICAP Funds, Inc. (since 2006); Vice President--
Compliance, Eclipse Funds, Eclipse Funds Inc. and MainStay
VP Series Fund, Inc. (2004 to 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002)
-------------------------------------------------------------------------------------------------
MARGUERITE E.H. Secretary since Managing Director and Associate General Counsel, New York
MORRISON* 2004 Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC (since
2005); Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP Funds,
Inc. (since 2006); Chief Legal Officer--Mutual Funds and
Vice President and Corporate Counsel, The Prudential
Insurance Company of America (2000 to 2004)
-------------------------------------------------------------------------------------------------
</Table>
* In addition to serving as Secretary to the Trust, effective January 1, 2008,
Marguerite E.H. Morrison will assume the role of Chief Legal Officer to the
Trust.
Arphiela Arizmendi resigned as Treasurer and Principal Financial and Accounting
Officer of the Trust effective June 7, 2007.
Christopher O. Blunt resigned as President of the Trust effective March 12,
2007.
Alan J. Kirshenbaum resigned as Senior Vice President of the Trust effective
March 19, 2007.
48 MainStay Diversified Income Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay 130/30 Core Fund
MainStay 130/30 Growth Fund
MainStay All Cap Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay 130/30 High Yield Fund(2)
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Institutional Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Principal Preservation Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay 130/30 International Fund
MainStay Global High Income Fund
MainStay ICAP International Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
RETIREMENT FUNDS
MainStay Retirement 2010 Fund
MainStay Retirement 2020 Fund
MainStay Retirement 2030 Fund
MainStay Retirement 2040 Fund
MainStay Retirement 2050 Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
New York, New York
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
Chicago, Illinois
MACKAY SHIELDS LLC(3)
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
MCMORGAN & COMPANY LLC(3)
San Francisco, California
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
This page intentionally left blank
(NEW YORK LIFE INVESTMENT MANAGEMENT LLC LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2007 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO11872 (RECYCLE SYMBOL) MS329-07 MSDI11-12/07
16
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
EQUITY INDEX FUND
Message from the President
and
Annual Report
October 31, 2007
MESSAGE FROM
THE PRESIDENT
The 12-month period ended October 31, 2007, was a dynamic one for mutual fund
investors. U.S. equity markets generally advanced, with growth stocks out-
performing value stocks at all capitalization levels. Although past performance
is no guarantee of future results, international stocks as a whole provided even
stronger returns for U.S. investors.
The progress of the equity markets, however, was far from steady. In February,
weakness in Asian markets led to sharp price declines around the globe. The
correction caused many investors to reconsider whether China and other emerging
economies could sustain their rapid growth. Fortunately, strong
corporate-earnings reports and positive economic news helped the stock market
regain its footing.
In July and August, difficulties in the subprime-mortgage market led to another
stock-market correction. A number of high-profile mortgage originators either
closed their doors or were sold to larger entities. Other leading financial
services firms faced major write-offs because of subprime-mortgage exposure.
The Federal Open Market Committee (FOMC) took prompt action to increase
liquidity and stabilize the financial markets by lowering the discount rate and
the federal funds target rate during the reporting period. These Federal Reserve
moves helped calm investor concerns, and the stock market generally advanced
from August 16, 2007, the date of an unscheduled FOMC meeting, through the end
of October 2007.
Difficulties in the subprime-mortgage market led to a "flight to quality," or a
general movement toward fixed-income securities that carry lower risk. As demand
for short- and intermediate-term Treasury securities increased, yields fell
across much of the maturity spectrum. Yields rose, however, on 20-and 30-year
Treasury bonds, and the yield curve steepened during the 12-month reporting
period.
High-yield bonds rallied from November 2006 through May 2007. But in June and
July, the yield differences--or spreads--between high-yield bonds and comparable
Treasury securities began to widen. At the end of October 2007, these spreads
were wider than when the reporting period began, making high-yield securities
more attractive to investors willing to accept higher risk.
To help investors address the challenges of today's ever-changing markets, New
York Life Investment Management LLC provides access to seven institutional
investment boutiques, each with its own proprietary research and investment
culture. As advisors and subadvisors to MainStay Funds, these boutiques bring a
wealth of experience and market insight to our shareholders. The portfolio
managers of each MainStay Fund seek to consistently apply time-tested investment
principles across a wide variety of market environments.
The report that follows provides more specific information about the market
forces and investment decisions that affected your investment in MainStay Funds
from November 1, 2006, through October 31, 2007. Please read the report
carefully. As you do, bear in mind that this annual report reflects just a short
segment of your lifetime investment journey. We look forward to continuing to
work with you, wherever that journey may lead.
Sincerely,
- -s- Stephen P. Fisher
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
EQUITY INDEX FUND
MainStay Funds
Annual Report
October 31, 2007
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 8
- --------------------------------------------------------------------------------
Portfolio of Investments 9
- --------------------------------------------------------------------------------
Financial Statements 17
- --------------------------------------------------------------------------------
Notes to Financial Statements 21
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 26
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 27
- --------------------------------------------------------------------------------
Federal Income Tax Information 29
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 29
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 29
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 29
- --------------------------------------------------------------------------------
Trustees and Officers 30
</Table>
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT
MONTH-END PERFORMANCE INFORMATION, PLEASE CALL 1-800-MAINSTAY (1-800-624-6782)
OR VISIT WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES--MAXIMUM 3% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ----------------------------------------------------
With sales charges 10.41% 12.37% 5.97%
Excluding sales charges 13.83 13.06 6.29
</Table>
(PERFORMANCE GRAPH) (With sales charge)
<Table>
<Caption>
CLASS A S&P 500 INDEX
------- -------------
10/31/97 9700 10000
11723 12199
14627 15331
15393 16264
11477 12214
9670 10369
11570 12526
12543 13706
13543 14901
15690 17336
10/31/07 17863 19860
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- -------------------------------------------------------------------------------
S&P 500(R) Index(2) 14.56% 13.88% 7.10%
Average Lipper S&P 500 Index objective fund(3) 13.92 13.27 6.64
</Table>
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect maximum applicable sales charges explained in this paragraph, change in
share price, and reinvestment of dividend and capital-gain distributions. The
graph assumes an initial investment of $10,000 and reflects the deduction of all
sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 3% and an annual 12b-1
fee of .25%. Performance figures reflect certain fee waivers and/or expense
limitations, without which total returns may have been lower. These fee waivers
and/or expense limitations are contractual and may be modified or terminated
only with the approval of the Board of Trustees. The Manager may recoup the
amount of certain management fee waivers or expense reimbursements from the Fund
pursuant to the contract if such action does not cause the Fund to exceed
existing expense limitations and the recoupment is made within three years after
the year in which the Manager incurred the expense.
1. Performance figures shown reflect nonrecurring reimbursements from affiliates
for professional fees and losses attributable to shareholder trading
arrangements. If these nonrecurring reimbursements had not been made the
total return (excluding sales charges) would have been 13.03% for the
five-year period ended October 31, 2007, and 6.28% for the ten-year period
then ended.
2. "S&P 500(R)" and "S&P(R)" are trademarks of The McGraw-Hill Companies, Inc.,
and have been licensed for use. Standard & Poor's does not sponsor, endorse,
sell or promote the Fund or represent the advisability of investing in the
Fund. The S&P 500(R) Index is an unmanaged index and is widely regarded as
the standard for measuring large-cap U.S. stock-market performance. Results
assume reinvestment of all income and capital gains. The S&P 500(R) Index is
considered to be the Fund's broad-based securities-market index for
comparison purposes. An investment cannot be made directly in an index.
3. Lipper Inc. is an independent monitor of fund performance. Results are based
on total returns with all dividend and capital-gain distributions reinvested.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY EQUITY INDEX FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2007, to October 31, 2007,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1,
2007, to October 31, 2007.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six-months ended October 31, 2007. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/07 10/31/07 PERIOD(1) 10/31/07 PERIOD(1)
CLASS A SHARES $1,000.00 $1,051.80 $3.10 $1,022.00 $3.06
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's net annualized expense ratio of each class
(0.60% for Class A) multiplied by the average account value over the period,
divided by 365 and multiplied by 184 (to reflect the one-half year period).
6 MainStay Equity Index Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2007
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 91.6
Short-Term Investments (collateral from securities lending 13
is 4.6%)
Futures Contracts 0.3
Liabilities in Excess of Cash and Other Assets (4.9)
</Table>
See Portfolio of Investments on page 9 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2007 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. ExxonMobil Corp.
2. General Electric Co.
3. Microsoft Corp.
4. AT&T, Inc.
5. Procter & Gamble Co. (The)
6. Bank of America Corp.
7. Citigroup, Inc.
8. Cisco Systems, Inc.
9. Chevron Corp.
10. Johnson & Johnson
</Table>
www.mainstayfunds.com 7
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Francis J. Ok of New York Life
Investment Management LLC
HOW DID MAINSTAY EQUITY INDEX FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2007?
Excluding all sales charges, Class A shares of MainStay Equity Index Fund
returned 13.83% for the 12 months ended October 31, 2007. The Fund, which offers
only one share class, underperformed the 13.92% return of the average Lipper(1)
S&P 500 Index objective fund and the 14.56% return of the S&P 500(R) Index(2)
for the 12 months ended October 31, 2007. Because the Fund incurs operating
expenses that a hypothetical index does not, there will be times when the Fund's
performance lags that of the Index. The S&P 500(R) Index is the Fund's broad-
based securities-market index. See page 5 for Fund returns with sales charges.
DURING THE REPORTING PERIOD, WHICH INDUSTRIES WERE THE STRONGEST CONTRIBUTORS TO
THE FUND'S PERFORMANCE AND WHICH WERE THE WEAKEST CONTRIBUTORS?
On the basis of impact, which takes weightings and total returns into account,
the industry that made the strongest positive contribution to the Fund's
performance was oil, gas & consumable fuels. Computers & peripherals was the
second-strongest contributor, and energy equipment & services was third. The
industry that made the weakest contribution to the Fund's performance was
commercial banks. The second-weakest contributor was thrifts & mortgage finance,
followed by specialty retail.
DURING THE REPORTING PERIOD, WHICH INDUSTRIES HAD THE HIGHEST TOTAL RETURNS AND
WHICH HAD THE LOWEST?
In terms of total return, the best-performing industry in the S&P 500(R) Index
was construction & engineering, followed by Internet & catalog retail and auto
components. During the reporting period, thrifts & mortgage finance recorded the
lowest total return of any industry in the Index. Real estate management &
development had the second-lowest total return, followed by household durables.
WHICH INDIVIDUAL STOCKS WERE THE STRONGEST POSITIVE CONTRIBUTORS TO THE FUND'S
PERFORMANCE DURING THE REPORTING PERIOD AND WHICH WERE THE GREATEST DETRACTORS?
On the basis of impact, which takes weightings and total returns into
consideration, the stocks that made the greatest positive contributions to the
Fund's performance during the reporting period were Exxon Mobil, Apple and
General Electric. The weakest contributor was Citigroup, followed by Amgen and
Comcast.
DURING THE REPORTING PERIOD, WHICH INDIVIDUAL STOCKS HAD THE HIGHEST TOTAL
RETURNS AND WHICH HAD THE LOWEST TOTAL RETURNS?
Within the S&P 500(R) Index, the stock with the highest total return during the
12-month reporting period was National Oilwell Varco. Apple was second, followed
by Amazon.com. The individual Fund holding with the lowest total return for the
reporting period was Circuit City Stores, followed by MGIC Investment and
Countrywide Financial.
WERE THERE ANY CHANGES TO THE MAKEUP OF THE S&P 500(R) INDEX DURING THE
REPORTING PERIOD?
During the 12-month reporting period, there were 44 additions to the S&P 500(R)
Index and 44 deletions from it. Notable additions to the Index were Covidien and
Tyco Electronics, both of which were added when the companies were spun off from
Tyco International. Mellon Financial was a significant deletion during the
period. The deletion occurred when Mellon Financial was acquired by Bank of New
York.
The Fund was closed to new investors and new purchases as of January 1, 2002.
Index funds generally seek to reflect the performance of an index or an
allocation among indices, unlike other funds, whose objectives may, in some
cases, involve seeking to outperform an index or other benchmark. The Fund seeks
to track the performance and weightings of stocks in the S&P 500(R) Index. The
Index itself, however, may change from time to time as companies merge, divest
units, add to their market capitalization or face financial difficulties. In
addition, Standard & Poor's may occasionally adjust the Index to better reflect
the companies that Standard & Poor's believes are most representative of the
makeup of the U.S. economy. The Fund may invest in derivatives, which may
increase the volatility of the Fund's net asset value and may result in a loss
to the Fund.
1. See page 5 for more information on Lipper Inc.
2. See page 5 for more information on the S&P 500(R) Index.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecast made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
8 MainStay Equity Index Fund
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2007
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (91.6%)+
- ------------------------------------------------------------------------------
AEROSPACE & DEFENSE (2.6%)
Boeing Co. (The) 24,132 $ 2,379,174
General Dynamics Corp. 12,459 1,133,271
Goodrich Corp. 3,837 267,285
Honeywell International, Inc. 23,066 1,393,417
L-3 Communications Holdings, Inc. (a) 3,861 423,320
Lockheed Martin Corp. 10,692 1,176,548
Northrop Grumman Corp. 10,614 887,543
Precision Castparts Corp. 4,263 638,640
Raytheon Co. 13,435 854,600
Rockwell Collins, Inc. 5,143 384,748
United Technologies Corp. 30,554 2,340,131
------------
11,878,677
------------
AIR FREIGHT & LOGISTICS (0.9%)
C.H. Robinson Worldwide, Inc. 5,332 266,172
Expeditors International of Washington, Inc. 6,600 334,290
FedEx Corp. 9,546 986,484
United Parcel Service, Inc. Class B 32,340 2,428,734
------------
4,015,680
------------
AIRLINES (0.1%)
Southwest Airlines Co. 23,004 326,887
------------
AUTO COMPONENTS (0.2%)
Goodyear Tire & Rubber Co. (The) (b) 6,381 192,387
Johnson Controls, Inc. 18,387 803,880
------------
996,267
------------
AUTOMOBILES (0.4%)
Ford Motor Co. (a)(b) 64,718 574,049
General Motors Corp. 17,356 680,182
Harley-Davidson, Inc. 7,707 396,911
------------
1,651,142
------------
BEVERAGES (2.1%)
Anheuser-Busch Cos., Inc. 23,121 1,185,645
Brown-Forman Corp. Class B (a) 2,697 199,524
Coca-Cola Co. (The) 61,272 3,784,159
Coca-Cola Enterprises, Inc. 8,789 226,844
Constellation Brands, Inc. Class A (b) 5,901 148,233
Molson Coors Brewing Co. Class B 4,106 234,986
Pepsi Bottling Group, Inc. (The) 4,336 186,795
PepsiCo, Inc. 49,675 3,662,041
------------
9,628,227
------------
BIOTECHNOLOGY (1.2%)
Amgen, Inc. (b) 33,334 1,937,039
Biogen Idec, Inc. (b) 8,837 657,826
Celgene Corp. (a)(b) 11,768 776,688
Genzyme Corp. (b) 8,118 616,724
Gilead Sciences, Inc. (b) 28,601 1,321,080
------------
5,309,357
------------
</Table>
<Table>
<Caption>
SHARES VALUE
BUILDING PRODUCTS (0.1%)
American Standard Cos., Inc. 5,582 $ 208,041
Masco Corp. 11,279 271,598
------------
479,639
------------
CAPITAL MARKETS (3.2%)
American Capital Strategies, Ltd. (a) 5,810 252,212
Ameriprise Financial, Inc. 7,268 457,739
Bank of New York Mellon Corp. (The) 35,047 1,712,046
Bear Stearns Cos., Inc. (The) 3,544 402,598
Charles Schwab Corp. (The) 28,949 672,775
E*TRADE Financial Corp. (a)(b) 12,901 143,716
Federated Investors, Inc. Class B 2,793 120,099
Franklin Resources, Inc. 5,028 652,031
Goldman Sachs Group, Inc. (The) 12,531 3,106,686
Janus Capital Group, Inc. (a) 4,851 167,408
Legg Mason, Inc. 4,102 340,220
Lehman Brothers Holdings, Inc. 16,339 1,034,912
Merrill Lynch & Co., Inc. 26,504 1,749,794
Morgan Stanley 32,395 2,178,888
Northern Trust Corp. 5,939 446,672
State Street Corp. 11,942 952,613
T. Rowe Price Group, Inc. 8,135 522,592
------------
14,913,001
------------
CHEMICALS (1.6%)
Air Products & Chemicals, Inc. 6,642 649,920
Ashland, Inc. 1,717 100,822
Dow Chemical Co. (The) 29,166 1,313,637
E.I. du Pont de Nemours & Co. 28,250 1,398,658
Eastman Chemical Co. 2,573 171,336
Ecolab, Inc. 5,447 256,935
Hercules, Inc. 3,398 63,916
International Flavors & Fragrances, Inc. 2,535 132,352
Monsanto Co. 16,741 1,634,424
PPG Industries, Inc. 5,032 376,092
Praxair, Inc. 9,816 839,072
Rohm & Haas Co. 3,874 200,983
Sigma-Aldrich Corp. 3,948 203,993
------------
7,342,140
------------
COMMERCIAL BANKS (3.0%)
BB&T Corp. 16,985 627,935
Comerica, Inc. 4,726 220,610
Commerce Bancorp, Inc. 5,825 237,369
Fifth Third Bancorp 16,516 516,620
First Horizon National Corp. (a) 3,711 96,783
Huntington Bancshares, Inc. 11,187 200,359
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
COMMERCIAL BANKS (CONTINUED)
KeyCorp 12,086 $ 343,847
M&T Bank Corp. 2,322 230,993
Marshall & Ilsley Corp. 8,225 351,208
National City Corp. 19,542 473,894
PNC Financial Services Group, Inc. 10,563 762,226
Regions Financial Corp. (a) 21,625 586,470
SunTrust Banks, Inc. 10,771 781,975
Synovus Financial Corp. 10,098 266,183
U.S. Bancorp 53,226 1,764,974
Wachovia Corp. 58,637 2,681,470
Wells Fargo & Co. 102,844 3,497,724
Zions Bancorp 3,332 196,955
------------
13,837,595
------------
COMMERCIAL SERVICES & SUPPLIES (0.4%)
Allied Waste Industries, Inc. (b) 8,764 110,777
Avery Dennison Corp. 3,286 190,259
Cintas Corp. 4,165 152,439
Equifax, Inc. 4,485 172,673
Monster Worldwide, Inc. (b) 4,094 166,135
Pitney Bowes, Inc. 6,726 269,309
R.R. Donnelley & Sons Co. 6,715 270,547
Robert Half International, Inc. 5,058 152,195
Waste Management, Inc. 15,930 579,693
------------
2,064,027
------------
COMMUNICATIONS EQUIPMENT (2.6%)
Ciena Corp. (a)(b) 2,554 122,234
V Cisco Systems, Inc. (b) 187,408 6,195,708
Corning, Inc. 48,247 1,170,955
JDS Uniphase Corp. (a)(b) 6,378 97,328
Juniper Networks, Inc. (b) 15,738 566,568
Motorola, Inc. 71,200 1,337,848
QUALCOMM, Inc. 51,483 2,199,869
Tellabs, Inc. (b) 13,694 120,644
------------
11,811,154
------------
COMPUTERS & PERIPHERALS (4.2%)
Apple, Inc. (b) 26,726 5,076,604
Dell, Inc. (b) 69,815 2,136,339
EMC Corp. (b) 64,488 1,637,350
Hewlett-Packard Co. 79,413 4,104,064
International Business Machines Corp. 41,903 4,865,776
Lexmark International, Inc. Class A (b) 3,018 126,726
Network Appliance, Inc. (b) 10,949 344,784
QLogic Corp. (b) 4,762 73,954
SanDisk Corp. (a)(b) 6,987 310,223
Sun Microsystems, Inc. (b) 108,990 622,333
Teradata Corp. (b) 5,444 155,317
------------
19,453,470
------------
</Table>
<Table>
<Caption>
SHARES VALUE
CONSTRUCTION & ENGINEERING (0.1%)
Fluor Corp. 2,694 $ 425,652
Jacobs Engineering Group, Inc. (b) 1,800 156,870
------------
582,522
------------
CONSTRUCTION MATERIALS (0.1%)
Vulcan Materials Co. (a) 2,983 255,076
------------
CONSUMER FINANCE (0.9%)
American Express Co. 36,452 2,221,749
Capital One Financial Corp. 12,813 840,405
Discover Financial Services 14,698 283,671
SLM Corp. 12,594 593,933
------------
3,939,758
------------
CONTAINERS & PACKAGING (0.1%)
Ball Corp. 3,184 157,863
Bemis Co., Inc. (a) 3,176 89,436
Pactiv Corp. (b) 4,076 111,968
Sealed Air Corp. 4,887 121,833
Temple-Inland, Inc. 3,348 179,687
------------
660,787
------------
DISTRIBUTORS (0.1%)
Genuine Parts Co. 5,192 254,771
------------
DIVERSIFIED CONSUMER SERVICES (0.1%)
Apollo Group, Inc. Class A (b) 4,343 344,226
H&R Block, Inc. (a) 10,005 218,108
------------
562,334
------------
DIVERSIFIED FINANCIAL SERVICES (4.5%)
V Bank of America Corp. 136,615 6,595,772
CIT Group, Inc. 5,888 207,493
V Citigroup, Inc. 153,138 6,416,482
CME Group, Inc. 1,649 1,098,646
IntercontinentalExchange, Inc. (a)(b) 2,100 374,220
JPMorgan Chase & Co. 104,138 4,894,486
Leucadia National Corp. (a) 5,100 258,366
Moody's Corp. (a) 6,762 295,635
NYSE Euronext (a) 6,500 610,155
------------
20,751,255
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (2.8%)
V AT&T, Inc. 187,682 7,843,231
CenturyTel, Inc. 3,377 148,757
Citizens Communications Co. 10,375 136,535
Embarq Corp. 4,748 251,264
Qwest Communications International, Inc. (a)(b) 49,197 353,234
Verizon Communications, Inc. 89,412 4,119,211
Windstream Corp. 14,279 192,053
------------
13,044,285
------------
</Table>
10 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
ELECTRIC UTILITIES (1.8%)
Allegheny Energy, Inc. (b) 4,990 $ 302,693
American Electric Power Co., Inc. 12,340 594,911
Duke Energy Corp. 38,831 744,390
Edison International 10,043 583,398
Entergy Corp. 5,987 717,662
Exelon Corp. 20,795 1,721,410
FirstEnergy Corp. 9,406 655,598
FPL Group, Inc. 12,514 856,208
Pinnacle West Capital Corp. (a) 3,043 122,937
PPL Corp. 11,767 608,354
Progress Energy, Inc. 7,885 378,480
Southern Co. (The) 23,263 852,822
------------
8,138,863
------------
ELECTRICAL EQUIPMENT (0.4%)
Cooper Industries, Ltd. Class A 5,653 296,161
Emerson Electric Co. 24,451 1,278,054
Rockwell Automation, Inc. 4,651 320,361
------------
1,894,576
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.3%)
Agilent Technologies, Inc. (b) 11,954 440,505
Jabil Circuit, Inc. 6,348 137,942
Molex, Inc. 4,318 123,322
Tektronix, Inc. 2,318 87,736
Tyco Electronics, Ltd. 15,224 543,040
------------
1,332,545
------------
ENERGY EQUIPMENT & SERVICES (2.1%)
Baker Hughes, Inc. 9,825 852,023
BJ Services Co. (a) 9,126 229,884
ENSCO International, Inc. 4,528 251,259
Halliburton Co. 27,446 1,081,921
Nabors Industries, Ltd. (b) 8,678 243,678
National Oilwell Varco, Inc. (b) 10,928 800,367
Noble Corp. 8,132 430,589
Rowan Cos., Inc. 3,329 129,764
Schlumberger, Ltd. 36,712 3,545,278
Smith International, Inc. 6,142 405,679
Transocean, Inc. (b) 8,933 1,066,332
Weatherford International, Ltd. (b) 10,357 672,273
------------
9,709,047
------------
FOOD & STAPLES RETAILING (2.1%)
Costco Wholesale Corp. 13,492 907,472
CVS Caremark Corp. 45,605 1,904,921
Kroger Co. (The) 21,651 636,323
Safeway, Inc. 13,531 460,054
SUPERVALU, Inc. 6,488 251,410
Sysco Corp. 18,732 642,320
Walgreen Co. (a) 30,623 1,214,202
</Table>
<Table>
<Caption>
SHARES VALUE
FOOD & STAPLES RETAILING (CONTINUED)
Wal-Mart Stores, Inc. 73,890 $ 3,340,567
Whole Foods Market, Inc. (a) 4,249 210,495
------------
9,567,764
------------
FOOD PRODUCTS (1.3%)
Archer-Daniels-Midland Co. 19,887 711,557
Campbell Soup Co. 6,896 255,014
ConAgra Foods, Inc. 15,091 358,109
Dean Foods Co. 4,082 113,357
General Mills, Inc. 10,194 588,500
H.J. Heinz Co. 9,891 462,701
Hershey Co. (The) 5,309 228,871
Kellogg Co. 8,274 436,784
Kraft Foods, Inc. Class A 48,494 1,620,185
McCormick & Co., Inc. 4,034 141,311
Sara Lee Corp. 22,442 371,191
Tyson Foods, Inc. Class A 8,432 133,226
Wm. Wrigley Jr. Co. 6,696 412,942
------------
5,833,748
------------
GAS UTILITIES (0.1%)
Nicor, Inc. (a) 1,374 59,453
Questar Corp. 5,259 300,184
------------
359,637
------------
HEALTH CARE EQUIPMENT & SUPPLIES (1.5%)
Baxter International, Inc. 19,989 1,199,540
Becton, Dickinson & Co. 7,485 624,698
Boston Scientific Corp. (b) 41,254 572,193
C.R. Bard, Inc. 3,137 262,285
Covidien, Ltd. 15,224 633,318
Hospira, Inc. (b) 4,739 195,863
Medtronic, Inc. 34,889 1,655,134
St. Jude Medical, Inc. (b) 10,549 429,661
Stryker Corp. 7,345 521,495
Varian Medical Systems, Inc. (b) 3,902 190,301
Zimmer Holdings, Inc. (b) 7,230 502,413
------------
6,786,901
------------
HEALTH CARE PROVIDERS & SERVICES (2.0%)
Aetna, Inc. 15,712 882,543
AmerisourceBergen Corp. 5,542 261,084
Cardinal Health, Inc. 11,196 761,664
CIGNA Corp. 8,659 454,511
Coventry Health Care, Inc. (b) 4,860 293,107
Express Scripts, Inc. (b) 9,344 589,606
Humana, Inc. (b) 5,206 390,190
Laboratory Corp. of America Holdings (b) 3,568 245,300
Manor Care, Inc. (a) 2,207 146,942
McKesson Corp. 9,110 602,171
Medco Health Solutions, Inc. (b) 8,361 789,111
Patterson Cos., Inc. (b) 4,178 163,402
Quest Diagnostics, Inc. 4,926 261,965
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES (CONTINUED)
Tenet Healthcare Corp. (a)(b) 14,264 $ 50,067
UnitedHealth Group, Inc. 40,787 2,004,681
WellPoint, Inc. (b) 18,599 1,473,599
------------
9,369,943
------------
HEALTH CARE TECHNOLOGY (0.0%)++
IMS Health, Inc. (a) 6,113 154,109
------------
HOTELS, RESTAURANTS & LEISURE (1.4%)
Carnival Corp. (a) 13,393 642,596
Darden Restaurants, Inc. 4,436 190,748
Harrah's Entertainment, Inc. 5,797 511,585
International Game Technology 10,289 448,703
Marriott International, Inc. Class A 9,892 406,660
McDonald's Corp. 36,602 2,185,139
Starbucks Corp. (b) 22,723 606,250
Starwood Hotels & Resorts Worldwide, Inc. 6,583 374,309
Wendy's International, Inc. 2,636 91,627
Wyndham Worldwide Corp. 5,562 182,600
Yum! Brands, Inc. 15,985 643,716
------------
6,283,933
------------
HOUSEHOLD DURABLES (0.4%)
Black & Decker Corp. 2,012 180,899
Centex Corp. 3,561 89,239
D.R. Horton, Inc. 8,231 104,450
Fortune Brands, Inc. 4,754 398,243
Harman International Industries, Inc. 1,994 167,895
KB Home (a) 2,420 66,889
Leggett & Platt, Inc. 5,455 105,991
Lennar Corp. Class A (a) 4,183 95,582
Newell Rubbermaid, Inc. (a) 8,347 243,399
Pulte Homes, Inc. (a) 6,380 94,679
Snap-on, Inc. 1,800 89,838
Stanley Works (The) 2,476 142,494
Whirlpool Corp. (a) 2,369 187,577
------------
1,967,175
------------
HOUSEHOLD PRODUCTS (2.0%)
Clorox Co. (The) 4,289 268,363
Colgate-Palmolive Co. 15,733 1,199,956
Kimberly-Clark Corp. 13,086 927,667
V Procter & Gamble Co. (The) 95,996 6,673,642
------------
9,069,628
------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (0.2%)
AES Corp. (The) (b) 20,585 440,725
Constellation Energy Group, Inc. 5,545 525,112
</Table>
<Table>
<Caption>
SHARES VALUE
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (CONTINUED)
Dynegy, Inc. Class A (b) 15,238 $ 140,342
------------
1,106,179
------------
INDUSTRIAL CONGLOMERATES (3.5%)
3M Co. 21,984 1,898,537
V General Electric Co. 315,333 12,979,106
Textron, Inc. 7,686 531,948
Tyco International, Ltd. 15,224 626,772
------------
16,036,363
------------
INSURANCE (4.0%)
ACE, Ltd. 10,086 611,312
AFLAC, Inc. 15,037 944,023
Allstate Corp. (The) 17,970 941,628
Ambac Financial Group, Inc. (a) 3,172 116,825
American International Group, Inc. 78,918 4,981,304
Aon Corp. 9,134 413,953
Assurant, Inc. 3,113 181,924
Chubb Corp. (The) 12,149 648,149
Cincinnati Financial Corp. 5,271 209,680
Genworth Financial, Inc. Class A 13,544 369,751
Hartford Financial Services Group, Inc. (The) 9,823 953,126
Lincoln National Corp. 8,319 518,856
Loews Corp. 13,623 668,753
Marsh & McLennan Cos., Inc. 16,639 430,784
MBIA, Inc. (a) 3,970 170,869
MetLife, Inc. 22,869 1,574,531
Principal Financial Group, Inc. 8,195 554,556
Progressive Corp. (The) (a) 22,307 412,680
Prudential Financial, Inc. 14,148 1,368,395
SAFECO Corp. 3,256 188,522
Torchmark Corp. 2,945 191,896
Travelers Cos., Inc. (The) 20,160 1,052,554
Unum Group 11,045 257,790
XL Capital, Ltd. Class A 5,556 399,754
------------
18,161,615
------------
INTERNET & CATALOG RETAIL (0.3%)
Amazon.com, Inc. (a)(b) 9,421 839,882
Expedia, Inc. (b) 6,300 205,758
IAC/InterActiveCorp. (b) 5,878 173,166
------------
1,218,806
------------
INTERNET SOFTWARE & SERVICES (1.8%)
Akamai Technologies, Inc. (a)(b) 5,056 198,145
eBay, Inc. (b) 35,118 1,267,760
Google, Inc. Class A (b) 7,121 5,034,547
VeriSign, Inc. (a)(b) 7,562 257,789
Yahoo!, Inc. (b) 41,508 1,290,899
------------
8,049,140
------------
</Table>
12 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
IT SERVICES (0.8%)
Affiliated Computer Services, Inc. Class A (b) 3,006 $ 152,284
Automatic Data Processing, Inc. 16,366 811,099
Cognizant Technology Solutions Corp. Class A (b) 8,976 372,145
Computer Sciences Corp. (b) 5,406 315,656
Convergys Corp. (b) 4,174 76,509
Electronic Data Systems Corp. 15,703 339,028
Fidelity National Information Services, Inc. 5,232 241,300
Fiserv, Inc. (b) 5,260 291,404
Paychex, Inc. 10,449 436,559
Unisys Corp. (b) 10,439 63,469
Western Union Co. (The) 23,632 520,849
------------
3,620,302
------------
LEISURE EQUIPMENT & PRODUCTS (0.2%)
Brunswick Corp. 2,783 62,089
Eastman Kodak Co. (a) 8,657 248,110
Hasbro, Inc. 5,002 149,310
Mattel, Inc. 12,069 252,121
------------
711,630
------------
LIFE SCIENCES TOOLS & SERVICES (0.3%)
Applera Corp.-Applied BioSystems Group 5,519 204,976
Millipore Corp. (b) 1,652 128,278
PerkinElmer, Inc. (a) 3,802 104,631
Thermo Fisher Scientific, Inc. (b) 13,164 774,175
Waters Corp. (b) 3,051 234,866
------------
1,446,926
------------
MACHINERY (1.6%)
Caterpillar, Inc. 19,678 1,468,176
Cummins, Inc. 3,247 389,510
Danaher Corp. 7,551 646,894
Deere & Co. 6,790 1,051,771
Dover Corp. 6,333 291,318
Eaton Corp. 4,479 414,666
Illinois Tool Works, Inc. 12,959 742,032
Ingersoll-Rand Co., Ltd. Class A 8,852 445,698
ITT Corp. 5,533 370,268
PACCAR, Inc. 11,546 641,496
Pall Corp. 3,789 151,825
Parker Hannifin Corp. 5,365 431,185
Terex Corp. (b) 3,103 230,305
------------
7,275,144
------------
MEDIA (2.7%)
CBS Corp. Class B 21,081 605,025
Clear Channel Communications, Inc. 15,208 574,406
Comcast Corp. Class A (b) 95,319 2,006,465
DIRECTV Group, Inc. (The) (b) 23,389 619,341
</Table>
<Table>
<Caption>
SHARES VALUE
MEDIA (CONTINUED)
Dow Jones & Co., Inc. (a) 1,987 $ 118,842
E.W. Scripps Co. (The) Class A 2,793 125,713
Gannett Co., Inc. 7,194 305,097
Interpublic Group of Cos., Inc. (The) (b) 14,372 148,750
McGraw-Hill Cos., Inc. (The) 10,536 527,221
Meredith Corp. (a) 1,136 70,716
New York Times Co. (The) Class A (a) 4,381 85,692
News Corp. Class A 71,295 1,544,963
Omnicom Group, Inc. 10,184 519,180
Time Warner, Inc. 114,879 2,097,691
Tribune Co. 2,560 77,466
Viacom, Inc. Class B (b) 21,141 872,912
Walt Disney Co. (The) 59,760 2,069,489
------------
12,368,969
------------
METALS & MINING (1.0%)
Alcoa, Inc. 27,248 1,078,748
Allegheny Technologies, Inc. (a) 3,134 320,201
Freeport-McMoRan Copper & Gold, Inc. Class B 11,795 1,388,036
Newmont Mining Corp. 13,837 703,750
Nucor Corp. 8,899 551,916
Titanium Metals Corp. (b) 2,200 77,440
United States Steel Corp. 3,672 396,209
------------
4,516,300
------------
MULTILINE RETAIL (0.8%)
Big Lots, Inc. (a)(b) 3,141 75,321
Dillard's, Inc. Class A (a) 1,822 41,961
Family Dollar Stores, Inc. (a) 4,570 115,849
J.C. Penney Co., Inc. 6,828 384,007
Kohl's Corp. (b) 9,897 544,038
Macy's, Inc. 13,306 426,191
Nordstrom, Inc. 6,105 240,781
Sears Holdings Corp. (a)(b) 2,371 319,587
Target Corp. 26,082 1,600,392
------------
3,748,127
------------
MULTI-UTILITIES (1.0%)
Ameren Corp. 6,402 346,092
CenterPoint Energy, Inc. 9,783 163,963
CMS Energy Corp. 6,704 113,767
Consolidated Edison, Inc. (a) 8,282 389,999
Dominion Resources, Inc. 8,970 821,921
DTE Energy Co. 5,236 259,706
Integrys Energy Group, Inc. 2,308 124,193
NiSource, Inc. 8,284 169,408
PG&E Corp. 10,742 525,606
Public Service Enterprise Group, Inc. 7,814 747,018
Sempra Energy 8,122 499,584
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
MULTI-UTILITIES (CONTINUED)
TECO Energy, Inc. 6,356 $ 106,971
Xcel Energy, Inc. 12,909 291,098
------------
4,559,326
------------
OFFICE ELECTRONICS (0.1%)
Xerox Corp. (b) 29,052 506,667
------------
OIL, GAS & CONSUMABLE FUELS (8.6%)
Anadarko Petroleum Corp. 14,175 836,609
Apache Corp. 10,203 1,059,173
Chesapeake Energy Corp. 12,695 501,199
V Chevron Corp. 65,602 6,003,239
ConocoPhillips 50,077 4,254,542
CONSOL Energy, Inc. 5,585 315,553
Devon Energy Corp. 13,689 1,278,553
El Paso Corp. 21,515 379,955
EOG Resources, Inc. 7,511 665,475
V ExxonMobil Corp. 170,694 15,702,141
Hess Corp. 8,540 611,549
Marathon Oil Corp. 21,965 1,298,790
Murphy Oil Corp. 5,797 426,833
Noble Energy, Inc. 5,300 405,662
Occidental Petroleum Corp. 25,583 1,766,506
Peabody Energy Corp. 8,039 448,174
Spectra Energy Corp. 19,458 505,519
Sunoco, Inc. 3,718 273,645
Tesoro Corp. (a) 4,200 254,226
Valero Energy Corp. 17,050 1,200,832
Williams Cos., Inc. 18,490 674,700
XTO Energy, Inc. 11,893 789,457
------------
39,652,332
------------
PAPER & FOREST PRODUCTS (0.3%)
International Paper Co. 13,223 488,722
MeadWestvaco Corp. 5,519 185,659
Weyerhaeuser Co. (a) 6,671 506,396
------------
1,180,777
------------
PERSONAL PRODUCTS (0.1%)
Avon Products, Inc. 13,443 550,894
Estee Lauder Cos., Inc. (The) Class A 3,583 157,294
------------
708,188
------------
PHARMACEUTICALS (5.7%)
Abbott Laboratories 47,530 2,596,089
Allergan, Inc. 9,437 637,752
Barr Pharmaceuticals, Inc. (a)(b) 3,398 194,773
Bristol-Myers Squibb Co. 60,915 1,826,841
Eli Lilly & Co. 30,352 1,643,561
Forest Laboratories, Inc. (b) 9,646 376,869
</Table>
<Table>
<Caption>
SHARES VALUE
PHARMACEUTICALS (CONTINUED)
V Johnson & Johnson 89,059 $ 5,803,975
King Pharmaceuticals, Inc. (b) 7,389 78,323
Merck & Co., Inc. 67,065 3,907,207
Mylan, Inc. 7,471 112,364
Pfizer, Inc. 213,200 5,246,852
Schering-Plough Corp. 49,905 1,523,101
Watson Pharmaceuticals, Inc. (b) 3,132 95,714
Wyeth 41,313 2,009,051
------------
26,052,472
------------
REAL ESTATE INVESTMENT TRUSTS (1.0%)
Apartment Investment & Management Co. Class A 2,982 139,349
AvalonBay Communities, Inc. 2,484 304,663
Boston Properties, Inc. 3,685 399,233
Developers Diversified Realty Corp. 3,912 197,165
Equity Residential (a) 8,505 355,339
General Growth Properties, Inc. 7,543 410,037
Host Hotels & Resorts, Inc. (a) 15,860 351,458
Kimco Realty Corp. (a) 7,817 324,562
Plum Creek Timber Co., Inc. 5,408 241,575
ProLogis 7,956 570,763
Public Storage 3,868 313,192
Simon Property Group, Inc. 6,913 719,712
Vornado Realty Trust (a) 4,164 465,202
------------
4,792,250
------------
REAL ESTATE MANAGEMENT & DEVELOPMENT (0.0%)++
CB Richard Ellis Group, Inc. Class A (b) 6,050 147,499
------------
ROAD & RAIL (0.7%)
Burlington Northern Santa Fe Corp. 9,229 804,307
CSX Corp. 13,400 599,918
Norfolk Southern Corp. 12,070 623,416
Ryder System, Inc. 1,924 92,063
Union Pacific Corp. 8,158 1,044,550
------------
3,164,254
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (2.4%)
Advanced Micro Devices, Inc. (a)(b) 17,008 222,465
Altera Corp. 10,926 214,368
Analog Devices, Inc. 9,619 321,852
Applied Materials, Inc. 42,361 822,651
Broadcom Corp. Class A (b) 14,407 468,948
Intel Corp. 179,776 4,835,974
KLA-Tencor Corp. 5,826 306,739
Linear Technology Corp. (a) 6,786 224,074
LSI Corp. (a)(b) 21,937 144,784
MEMC Electronic Materials, Inc. (b) 6,923 506,902
Microchip Technology, Inc. 6,700 222,239
Micron Technology, Inc. (a)(b) 22,911 240,795
National Semiconductor Corp. 7,333 184,352
</Table>
14 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (CONTINUED)
Novellus Systems, Inc. (b) 3,731 $ 105,998
NVIDIA Corp. (b) 16,874 597,002
Teradyne, Inc. (b) 6,047 74,620
Texas Instruments, Inc. 43,902 1,431,205
Xilinx, Inc. 9,185 224,114
------------
11,149,082
------------
SOFTWARE (3.4%)
Adobe Systems, Inc. (b) 17,997 862,056
Autodesk, Inc. (b) 7,065 345,479
BMC Software, Inc. (b) 6,251 211,534
CA, Inc. 11,989 317,109
Citrix Systems, Inc. (b) 5,606 241,002
Compuware Corp. (b) 9,242 92,420
Electronic Arts, Inc. (b) 9,627 588,402
Intuit, Inc. (b) 10,468 336,756
V Microsoft Corp. 248,082 9,131,898
Novell, Inc. (b) 10,268 77,626
Oracle Corp. (b) 121,266 2,688,467
Symantec Corp. (b) 27,747 521,089
------------
15,413,838
------------
SPECIALTY RETAIL (1.4%)
Abercrombie & Fitch Co. Class A 2,656 210,355
AutoNation, Inc. (b) 4,650 82,259
AutoZone, Inc. (a)(b) 1,385 172,308
Bed Bath & Beyond, Inc. (b) 8,430 286,114
Best Buy Co., Inc. (a) 12,306 597,087
Circuit City Stores, Inc. (a) 5,200 41,236
Gap, Inc. (The) 15,288 288,943
Home Depot, Inc. (The) (a) 51,927 1,636,220
Limited Brands, Inc. 9,823 216,204
Lowe's Cos., Inc. 45,483 1,223,038
Office Depot, Inc. (b) 8,416 157,884
OfficeMax, Inc. 2,214 70,073
RadioShack Corp. (a) 4,033 83,160
Sherwin-Williams Co. (The) (a) 3,361 214,835
Staples, Inc. 22,068 515,067
Tiffany & Co. 4,228 229,073
TJX Cos., Inc. 13,868 401,201
------------
6,425,057
------------
TEXTILES, APPAREL & LUXURY GOODS (0.4%)
Coach, Inc. (b) 11,484 419,855
Jones Apparel Group, Inc. 2,928 61,312
Liz Claiborne, Inc. 3,080 87,688
NIKE, Inc. Class B 11,901 788,560
Polo Ralph Lauren Corp. 1,861 128,037
VF Corp. 2,773 241,611
------------
1,727,063
------------
</Table>
<Table>
<Caption>
SHARES VALUE
THRIFTS & MORTGAGE FINANCE (0.9%)
Countrywide Financial Corp. (a) 18,040 $ 279,981
Fannie Mae 29,968 1,709,375
Freddie Mac 20,021 1,045,697
Hudson City Bancorp, Inc. 16,307 255,368
MGIC Investment Corp. (a) 2,608 50,491
Sovereign Bancorp, Inc. (a) 10,840 156,421
Washington Mutual, Inc. (a) 26,980 752,202
------------
4,249,535
------------
TOBACCO (1.2%)
Altria Group, Inc. 64,824 4,727,614
Reynolds American, Inc. (a) 5,312 342,252
UST, Inc. (a) 4,868 259,562
------------
5,329,428
------------
TRADING COMPANIES & DISTRIBUTORS (0.0%)++
W.W. Grainger, Inc. 2,197 197,554
------------
WIRELESS TELECOMMUNICATION SERVICES (0.5%)
ALLTEL Corp. 10,806 768,847
Sprint Nextel Corp. 87,619 1,498,285
------------
2,267,132
------------
Total Common Stocks
(Cost $193,630,260) 420,007,875(f)
------------
SHORT-TERM INVESTMENTS (13.0%)
- ------------------------------------------------------------------------------
INVESTMENT COMPANY (4.6%)
State Street Navigator Securities Lending Prime
Portfolio (c) 21,044,782 21,044,782
------------
Total Investment Company
(Cost $21,044,782) 21,044,782
------------
<Caption>
PRINCIPAL
AMOUNT
U.S. GOVERNMENT (8.4%)
United States Treasury Bills
3.85%, due 1/10/08 $36,400,000 36,130,130
3.865%, due 1/24/08 (d) 2,200,000 2,180,427
------------
Total U.S. Government
(Cost $38,301,473) 38,310,557
------------
Total Short-Term Investments
(Cost $59,346,255) 59,355,339
------------
Total Investments
(Cost $252,976,515) 104.6% 479,363,214(g)
Liabilities in Excess of
Cash and Other Assets (4.6) (21,040,581)
----------- ------------
Net Assets 100.0% $458,322,633
=========== ============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
CONTRACTS UNREALIZED
LONG APPRECIATION (e)
FUTURES CONTRACTS (0.3%)
- -----------------------------------------------------------------------------
Standard & Poor's 500 Index
Mini December 2007 493 $ 1,293,980
-------------------
Total Futures Contracts
(Settlement Value $38,328,285) (f) $ 1,293,980
===================
</Table>
<Table>
++ Less than one-tenth of a percent.
+++ All of the Fund's assets are maintained to cover "senior
securities transactions" which may include, but are not
limited to, forwards, TBA's, options, and futures. These
securities are marked-to-market daily and reviewed against
the value of the Fund's "senior securities" holdings to
ensure proper coverage for these transactions.
(a) Represents a security, or a portion thereof, which is out on
loan. The aggregate market value of such securities is
$20,239,961; cash collateral of $21,044,782 (included in
liabilities) was received with which the Fund purchased
highly liquid short-term investments.
(b) Non-income producing security.
(c) Represents a security, or a portion thereof, purchased with
cash collateral received for securities on loan.
(d) Segregated as collateral for futures contracts.
(e) Represents the difference between the value of the contracts
at the time they were opened and the value at October 31,
2007.
(f) The combined market value of common stocks and settlement
value of Standard & Poor's 500 Index futures contracts
represents 100.0% of net assets.
(g) At October 31, 2007, cost is $259,301,742 for federal income
tax purposes and net unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $226,866,462
Gross unrealized depreciation (6,804,990)
------------
Net unrealized appreciation $220,061,472
============
</Table>
16 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2007
<Table>
ASSETS:
Investment in securities, at value (identified
cost $252,976,515) including $20,239,961
market value of securities loaned $479,363,214
Cash 71,443
Receivables:
Variation margin on futures contracts 471,323
Dividends and interest 381,938
Other assets 9,761
-------------
Total assets 480,297,679
-------------
LIABILITIES:
Securities lending collateral 21,044,782
Payables:
Fund shares redeemed 551,033
Transfer agent (See Note 3) 117,275
NYLIFE Distributors (See Note 3) 103,881
Shareholder communication 63,782
Manager (See Note 3) 45,225
Professional fees 30,156
Custodian 7,958
Trustees 6,093
Accrued expenses 4,861
-------------
Total liabilities 21,975,046
-------------
Net assets $458,322,633
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized $ 84,336
Additional paid-in capital 273,937,265
-------------
274,021,601
Accumulated undistributed net investment
income 5,990,303
Accumulated net realized loss on investments
and futures transactions (49,369,950)
Net unrealized appreciation on investments and
futures contracts 227,680,679
-------------
Net assets applicable to outstanding shares $458,322,633
=============
Shares of beneficial interest outstanding (a) 8,433,574
=============
Net asset value per share outstanding (a) $ 54.35
Maximum sales charge (3.00% of offering price)
(a) 1.68
-------------
Maximum offering price per share outstanding
(a) $ 56.03
=============
</Table>
(a) Adjusted to reflect the effects of the reverse stock split on December 12,
2007 (See Note 2 (C) on page 21.)
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 17
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2007
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 8,839,264
Interest 1,162,349
Income from securities loaned--net 45,641
------------
Total income 10,047,254
------------
EXPENSES:
Manager (See Note 3) 1,188,183
Distribution/Service--(See Note 3) 1,188,183
Transfer agent (See Note 3) 734,863
Shareholder communication 129,411
Professional fees 117,697
Recordkeeping 74,194
Custodian 33,227
Trustees 26,534
Registration 22,100
Miscellaneous 25,504
------------
Total expenses before waiver 3,539,896
Expense waiver from Manager (See Note 3) (688,252)
------------
Net expenses 2,851,644
------------
Net investment income 7,195,610
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FUTURES
TRANSACTIONS:
Net realized gain on:
Security transactions 40,844,624
Futures transactions 3,864,304
------------
Net realized gain on investments and futures
transactions 44,708,928
------------
Net change in unrealized appreciation on:
Security transactions 9,895,618
Futures contracts 103,231
------------
Net change in unrealized appreciation on
investments and futures contracts 9,998,849
------------
Net realized and unrealized gain on investments
and futures transactions 54,707,777
------------
Net increase in net assets resulting from
operations $61,903,387
============
</Table>
18 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2007 AND OCTOBER 31, 2006
<Table>
<Caption>
2007 2006
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 7,195,610 $ 7,628,524
Net realized gain on investments
and futures transactions 44,708,928 29,302,818
Net increase from payments from
Manager for losses attributable
to shareholder trading
arrangements (See Note 3(B) on
page 23.) -- 516,000
Net change in unrealized
appreciation on investments and
futures contracts 9,998,849 39,533,606
----------------------------
Net increase in net assets
resulting from operations 61,903,387 76,980,948
----------------------------
Dividends to shareholders:
From net investment income (7,520,264) (6,709,434)
----------------------------
Capital share transactions:
Net proceeds from sale of shares 211,552 74,135
Net asset value of shares issued
to shareholders in reinvestment
of dividends 7,246,847 6,402,778
Cost of shares redeemed (98,489,517) (132,084,363)
----------------------------
Decrease in net assets derived
from capital share transactions (91,031,118) (125,607,450)
----------------------------
Net decrease in net assets (36,647,995) (55,335,936)
NET ASSETS:
Beginning of year 494,970,628 550,306,564
----------------------------
End of year $ 458,322,633 $494,970,628
============================
Accumulated undistributed net
investment income at end of year $ 5,990,303 $ 6,642,296
============================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2007 2006 2005 2004 2003
Net asset value at beginning of period (c) $ 48.46 $ 42.34 $ 39.60 $ 36.66 $ 30.50
-------- -------- -------- -------- -----------
Net investment income (c) 0.77 (g) 0.74 0.62 (d) 0.28 0.19
Net realized and unrealized gain (loss) on
investments (c) 5.87 5.91 (f) 2.55 2.79 5.97
-------- -------- -------- -------- -----------
Total from investment operations (c) 6.64 6.65 3.17 3.07 6.16
-------- -------- -------- -------- -----------
Less dividends and distributions:
From net investment income (c) (0.75) (0.53) (0.43) (0.13) --
From net realized gain on investments
(c) -- -- -- -- --
-------- -------- -------- -------- -----------
Total dividends and distributions (c) (0.75) (0.53) (0.43) (0.13) --
-------- -------- -------- -------- -----------
Net asset value at end of period (c) $ 54.35 $ 48.46 $ 42.34 $ 39.60 $ 36.66
======== ======== ======== ======== ===========
Total investment return (a) 13.83% 15.85%(e)(f) 7.97% 8.42% 20.23%(b)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.51% 1.45% 1.40%(d) 0.73% 0.72%+
Net expenses 0.60% 0.64% 0.74% 0.96% 1.04%+
Expenses (before waiver/reimbursement) 0.74% 0.79%(e) 1.03% 1.02% 1.04%+
Portfolio turnover rate 5% 5% 6% 3% 2%
Net assets at end of period (in 000's) $458,323 $494,971 $550,307 $607,542 $646,450
<Caption>
YEAR ENDED
DECEMBER 31,
2002
Net asset value at beginning of period (c) $ 41.48
------------
Net investment income (c) 0.23
Net realized and unrealized gain (loss) on
investments (c) (9.66)
------------
Total from investment operations (c) (9.43)
------------
Less dividends and distributions:
From net investment income (c) (0.31)
From net realized gain on investments
(c) (1.24)
------------
Total dividends and distributions (c) (1.55)
------------
Net asset value at end of period (c) $ 30.50
============
Total investment return (a) (22.70%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 0.59%
Net expenses 1.02%
Expenses (before waiver/reimbursement) 1.02%
Portfolio turnover rate 4%
Net assets at end of period (in 000's) $589,034
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
+ Annualized.
(a) Total return is calculated exclusive of sales charges.
(b) Total return is not annualized.
(c) Adjusted to reflect the cumulative effects of the reverse stock split in each period, as
well as the reverse stock split on December 12, 2007. (See Note 2(C) on page 21.)
(d) Net investment income and the ratio of net investment income includes $0.12 per share and
0.29%, respectively as a result of a special one time dividend from Microsoft Corp.
(e) Includes nonrecurring reimbursements from Manager for professional fees. The effect on
total return was less than one hundredth of a percent.
(f) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses were $0.04 per share on net
realized gains on investments and the effect on total investment return, was 0.12%,
respectively.
(g) Per share data based on average shares outstanding during the period.
</Table>
20 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises nineteen funds (collectively referred to as the
"Funds"). These financial statements and notes relate only to MainStay Equity
Index Fund (the "Fund"). The Board of Trustees of the Trust approved the closure
of the Fund to new investors and new share purchases effective January 1, 2002.
Existing shareholders are permitted to reinvest dividends only and NYLIFE LLC
will continue to honor the unconditional guarantee associated with the Fund.
(See Note 10 on page 25.)
The Fund's investment objective is to seek to provide investment results that
correspond to the total return performance (and reflect reinvestment of
dividends) of publicly traded common stocks represented by the S&P 500(R) Index.
When formed the Fund was sub-classified as a "non-diversified" fund, which meant
that it could invest a greater percentage of its assets than other funds in a
particular issuer. However, due to the Fund's principal investment strategy and
investment process, it has historically operated as a "diversified" fund.
Therefore, the Fund will not operate as a "non-diversified" fund without first
obtaining shareholder approval.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). Securities that are not traded on the valuation date are
valued at the mean of the latest quoted bid and asked prices. Prices normally
are taken from the principal market in which each security trades. Futures
contracts are valued at the last posted settlement price on the market where
such futures are primarily traded. Investments in mutual funds are valued at
their net asset value as of the close of the New York Stock Exchange on the date
of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: a security the trading for which has been
halted or suspended; a debt security that has recently gone into default and for
which there is not a current market quotation; a security of an issuer that has
entered into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; a security where the trading on that security's principal market
is temporarily closed at a time when, under normal conditions, it would be open.
At October 31, 2007 the Fund did not hold securities that were valued in such a
manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
of net investment income and distributions of net realized capital and currency
gains, if any, annually. All dividends and distributions are reinvested in
shares of the Fund, at net asset value, unless the shareholder elects otherwise.
Dividends and distributions to shareholders are determined in accordance with
federal income tax regulations and may differ from generally accepted accounting
principles in the United States of America. Permanent book/tax differences
relating to income and gains are reclassified amongst undistributed net
investment income, accumulated net realized gain or loss and paid-in-capital.
The Fund declared a dividend of $0.7133 per share which was paid on December 12,
2007, and also underwent a reverse share split on that day. The reverse share
split rate was 0.98617 per share outstanding calculated on fund shares
outstanding immediately after reinvestment of dividends.
Certain amounts in the Financial Highlights and Notes to Financial Statements
(See Note 9 on page 25.) have been adjusted to reflect the cumulative effects of
this reverse stock split and those that occurred in each of the periods
presented.
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight line
method.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (C) on
page 23) are allocated to separate classes of shares pro rata based upon their
relative net assets value on the date the expenses are incurred. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) FUTURES CONTRACTS. A futures contract is an agreement to purchase or sell a
specified quantity of an underlying instrument at a specified future date and
price, or to make or receive a cash payment based on the value of a securities
index. During the period the futures contract is open, changes in the value of
the contract are recognized as unrealized gains or losses by "marking to market"
such contract on a daily basis to reflect the market value of the contract at
the end of each day's trading. The Fund agrees to receive from or pay to the
broker an amount of cash equal to the daily fluctuation in the value of the
contract. Such receipts or payments are known as "variation margin". When the
futures contract is closed, the Fund records a realized gain or loss equal to
the difference between the proceeds from (or cost of) the closing transaction
and the Fund's basis in the contract. The Fund invests in stock index futures
contracts to gain full exposure to changes in stock market prices to fulfill its
investment objective.
The use of futures contracts involves, to varying degrees, elements of market
risk in excess of the amount recognized in the Statement of Assets and
Liabilities. The contract or notional amounts and variation margin reflect the
extent of the Fund's involvement in open futures positions. Risks arise from the
possible imperfect correlation in movements in the price of futures contracts,
interest rates and the underlying hedged assets, and the possible inability of
counterparties to meet the terms of their contracts. However, the Fund's
activities in futures contracts are conducted through regulated exchanges which
minimize counterparty credit risks.
(H) SECURITIES LENDING. In order to realize additional income the Fund may lend
its securities to broker-dealers and financial institutions. The loans are
collateralized by cash or securities at least equal at all times to the market
value of the securities loaned. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. The Fund may bear
the risk of delay in recovery of, or loss of rights in, the securities loaned
should the borrower of the securities experience financial difficulty. The Fund
receives compensation for lending its securities in the form of fees or it
retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(I) INDEMNIFICATIONS. In the normal course of business, the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote.
However, there can be no assurance that material liabilities related to such
obligations will not arise in the future which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER. New York Life Investment Management LLC ("NYLIM" or "Manager") a
registered investment adviser and an indirect wholly-owned subsidiary of New
York Life Insurance Company ("New York Life"), serves as the Fund's Manager.
NYLIM provides offices and conducts clerical, recordkeeping and bookkeeping
services, and is responsible for the financial and accounting records required
to be maintained by the Fund. NYLIM also pays the salaries and expenses of all
personnel affiliated with the Fund and all the operational expenses that are not
the responsibility of the Fund. The Fund is advised by the Manager directly,
without a Subadvisor.
The Fund is contractually obligated to pay NYLIM a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.25% on assets up to $1.0 billion, 0.225% on assets from
$1.0 billion to $3.0 billion and 0.20% on assets
22 MainStay Equity Index Fund
in excess of $3.0 billion. NYLIM has also contractually agreed to waive its
management fee by 0.06% to 0.19% on assets up to $1.0 billion, to 0.165% on
assets from $1.0 billion to $3.0 billion and to 0.14% on assets in excess of
$3.0 billion which is not recoupable.
Effective March 1, 2007, NYLIM has entered into a written expense limitation
agreement under which it has agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the Fund so that the total ordinary operating
expenses (total annual operating expenses excluding taxes, interest, litigation,
extraordinary expenses, and brokerage and other transaction expenses relating to
the purchase or sale of portfolio investments) do not exceed 0.60% of the
average daily net assets of the Fund. NYLIM may recoup the amount of any
management fee waiver or expense reimbursement from the Fund pursuant to the
agreement if such action does not cause the Fund to exceed the expense
limitations and the recoupment is made within three years after the year in
which NYLIM incurred the expense. This expense limitation may be modified or
terminated only with the approval of the Board of Trustees.
For the year ended October 31, 2007, NYLIM earned fees from the Fund in the
amount of $1,188,183 and waived expenses in the amount of $688,252 of which
$403,088 is recoupable.
As of October 31, 2007, the amounts of waived fees that are subject to possible
recoupment by NYLIM, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 2010 TOTAL
$209,184 $ 420,903 $403,088 $1,033,175
- ----------------------------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
State Street Bank & Trust Company ("SSBT"), One Lincoln Street, Boston,
Massachusetts, 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with NYLIM. These services include calculating
daily net asset values of the Fund, maintaining general ledger and sub-ledger
accounts for the calculation of the Fund's respective net asset values, and
assisting NYLIM in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, SSBT is compensated by
NYLIM.
(B) PAYMENT FROM AFFILIATES. NYLIM reimbursed or paid all expenses relating to
the Board of Trustees' review of certain shareholder trading matters as
described below in the footnote relating to "Other Matters." (See Note 10 on
page 25.)
The total costs associated with the Board of Trustees' review were approximately
$849,975 and included payments to certain third party service providers.
The amount that was reimbursed to the Fund was $60,567. Additional payments were
made by affiliates relating to the shareholder trading matters. Further
discussion regarding these payments by affiliates can be found below in the
footnote relating to "Other Matters."
(C) DISTRIBUTION FEES. The Trust, on behalf of the Fund, has a Distribution
Agreement with NYLIFE Distributors LLC (the "Distributor"), an indirect
wholly-owned subsidiary of New York Life. The Fund has adopted a distribution
plan (the "Plan") in accordance with the provisions of Rule 12b-1 under the 1940
Act.
Pursuant to the Plan, the Distributor receives a monthly distribution fee from
the Fund at an annual rate of 0.25% of the Fund's average daily net assets,
which is an expense of the Fund for distribution or service activities as
designated by the Distributor.
The Plan provides that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund, for the year ended October 31, 2007,
amounted to $734,863.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts, effective March 1, 2007. Shareholders with an account
balance of less than $1,000 are charged an annual per account fee of $20
(assessed semi-annually).
(F) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2007, these fees, which are included in professional fees
shown on the Statement of Operations, were $17,759.
The Fund pays the Manager a monthly fee for certain pricing and recordkeeping
services provided under the Accounting Agreement at the annual rate of 1/20 of
1% for the first $20 million of average monthly net assets, 1/30 of
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1% of the next $80 million of average monthly net assets and 1/100 of 1% of any
amount in excess of $100 million of average monthly net assets. Fees for these
services provided to the Fund by the Manager amounted to $74,194 for the year
ended October 31, 2007.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2007, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$5,990,303 $(41,750,743) $ -- $220,061,472 $184,301,032
----------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized appreciation is
primarily due to wash sales deferrals.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income, accumulated net realized gain
on investments and additional paid-in-capital, arising from permanent
differences; net assets at October 31, 2007 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT GAIN (LOSS) ON ADDITIONAL
INCOME (LOSS) INVESTMENTS PAID-IN CAPITAL
$(327,339) $281,584 $45,755
-------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to real estate investment
trust distributions.
At October 31, 2007, for federal income tax purposes, capital loss carryforwards
of $41,750,743 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. To the extent that these loss carryforwards are used to
offset future capital gains, it is probable that the capital gains so offset
will not be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2010 $ 9,259
2011 29,198
2012 3,294
-------------------------------------------
$41,751
-------------------------------------------
</Table>
The Fund utilized $42,786,808 of capital loss carryforwards during the year
ended October 31, 2007.
The tax character of distributions paid during the years ended October 31, 2007
and October 31, 2006, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2007 2006
Distributions paid from:
Ordinary Income $7,520,264 $6,709,434
- -----------------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
SSBT is the custodian of cash and securities of the Fund. Custodial fees are
charged to the Fund based on the market value of securities in the Fund and the
number of certain cash transactions incurred by the Fund.
NOTE 6--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. These funds pay a commitment fee, at an annual rate of .060% of the
average commitment amount, regardless of usage, to The Bank of New York, which
acts as agent to the syndicate. Such commitment fees are allocated among the
funds based upon net assets and other factors. Interest on any revolving credit
loan is charged based upon the Federal Funds Advances rate. There were no
borrowings made or outstanding on the line of credit during the year ended
October 31, 2007.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2007, purchases and sales of securities, other
than short-term securities, were $21,646 and $125,349, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 7 (a) $ 212
Shares issued to shareholders in
reinvestment of dividends: 149 (a) 7,247
Shares redeemed (1,936)(a) (98,490)
--------------------------
Net decrease (1,780) $ (91,031)
==========================
Year ended October 31, 2006:
Shares sold 5 (a) $ 74
Shares issued to shareholders in
reinvestment of dividends: 150 (a) 6,403
Shares redeemed (2,978)(a) (132,084)
--------------------------
Net decrease (2,823) $(125,607)
==========================
</Table>
(a) Adjusted to reflect the cumulative effects of the reverse stock split in the
period, as well as the reverse stock split on December 12, 2007. (See Note
2(c) on page 21.)
NOTE 9--GUARANTEE:
NYLIFE LLC ("NYLIFE"), a wholly-owned subsidiary of New York Life, will
guarantee unconditionally and irrevocably pursuant to a Guaranty Agreement
between NYLIFE and the Fund (the "Guarantee") that if, on the business day
immediately after ten years from the date of purchase
24 MainStay Equity Index Fund
(the "Guarantee Date"), the net asset value ("NAV") of a Fund share plus the
value of all dividends and distributions paid, including cumulative reinvested
dividends and distributions attributable to such share paid during that ten-year
period ("Guaranteed Share"), is less than the price initially paid for the Fund
share ("Guaranteed Amount"), NYLIFE will pay shareholders an amount equal to the
difference between the Guaranteed Amount for each such Guaranteed share
outstanding and held by shareholders as of share and the net asset value of each
such of the close of business on the Guarantee Date. For the services that NYLIM
and its affiliates provide to the Fund, they receive the fees described in the
prospectus (see Note 3 on page 22). Neither NYLIM nor its affiliates receive a
separate fee for providing the Guarantee, although the Guarantee has been
considered in connection with the annual renewal of the management fee.
NOTE 10--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission ("SEC") and the New York State
Attorney General, and, as noted in the notes to the year-end 2004, 2005 and 2006
financial statements of each fund of the Trust, NYLIM was previously a party to
arrangements with certain registered representatives of broker-dealers relating
to the level of trading by clients of those registered representatives in shares
of certain funds of the Trust. All such arrangements were terminated by the
fourth quarter of 2003.
NYLIM and the Trustees of the Trust undertook a review of the possible dilutive
effects that transactions under those arrangements and certain other levels of
trading by Fund shareholders over the period from 1999 to 2003 may have had on
the funds. As a result of this review, in December 2005, NYLIM made payments
totaling $5.882 million to nine MainStay funds. The amount paid to the MainStay
Equity Index Fund was $516,000. NYLIM has reimbursed or paid all expenses
relating to the Board of Trustees' review of this matter.
In a separate matter, in 2004 the SEC raised concerns relating to a guarantee
provided to shareholders of the MainStay Equity Index Fund and the fees and
expenses of that Fund as well as the related guarantee disclosure to that fund's
shareholders. Discussions have been held with the SEC concerning a possible
resolution of this matter. There can be no assurance of the outcome of these
efforts.
NOTE 11--NEW ACCOUNTING PRONOUNCEMENT:
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation becomes effective for the Fund's 2008 fiscal
year, and is to be applied to all open tax years as of the date of
effectiveness. Based on Management's analysis, the determination has been made
that the adoption of the interpretation on November 1, 2007, did not have an
impact on the Fund's financial statements upon adoption. Management continually
reviews the Fund's tax positions and such conclusions under the Interpretation
based on factors, including, but not limited to, ongoing analyses of tax laws,
regulations and interpretations, thereof.
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The changes to current generally accepted accounting
principles from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures
about fair value measurements. As of October 31, 2007, the Fund does not believe
the adoption of SFAS No. 157 will impact the amounts reported in the Fund's
financial statements. However, additional disclosures may be required about the
inputs used to develop the measurements and the effect of certain measurements
reported in the financial statements for a fiscal period.
www.mainstayfunds.com 25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Equity Index Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2007, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the four-year period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the periods presented through October 31,
2003, were audited by other auditors, whose report dated December 18, 2003,
expressed an unqualified opinion thereon.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2007, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Equity Index Fund of The MainStay Funds as of October 31, 2007, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the four-year period then ended, in
conformity with U.S. generally accepted accounting principles.
-s- KPMG LLP
Philadelphia, Pennsylvania
December 20, 2007
26 MainStay Equity Index Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with New York Life Investment Management LLC (the "Manager") (the
"Agreement") at a meeting held on May 22 and 23, 2007. In connection with the
approval of the Agreement, the Trustees reviewed a significant amount of a wide
variety of information that they had requested and received from the Manager,
and data and analysis from an outside data provider and a third party
consultant. In their deliberations, the Trustees considered various regulatory
developments and industry trends, including the reduction of fees or net expense
ratios by certain other equity index funds. In considering approval of the
Agreement, and in evaluating the fairness of the compensation to be paid by the
Fund, the Trustees met both as a full Board and in executive session with no
Interested Trustee present, in advance of the meeting at which the Agreement was
approved, and they considered a number of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager. The Trustees reviewed the services that the Manager
have provided historically to the Fund, and also generally to other series of
the Trust. Among other services, the Manager's services have included investment
management services--which include, but are not limited to, monitoring and
evaluating the Fund's investment program and investment results, providing the
day-to-day portfolio management of the Fund, determining the composition of
assets of the Fund and the timing of the Fund's execution of the purchase and
sale of assets, and the Fund's compliance with its investment policies and
restrictions--and administrative services, including working with other service
providers of the Trust, maintaining certain Fund records, providing office
space, managing reverse stock splits, performing clerical and bookkeeping
services for the Fund, preparing Board materials and Fund filings, and otherwise
managing the Trust's operations. The Trustees considered, among other things,
the Manager's management, personnel, resources, operations and portfolio
management capabilities. The Board reviewed reports on the Manager's brokerage
practices, including with respect to best execution of portfolio trades. The
Trustees considered the Manager's supervision of the Fund's service providers
and its attention to the compliance program of the Trust, the Manager, and
certain other service providers. The Trustees noted the generally favorable
results of a third party review of the services and communications that NYLIM
Service Company LLC, an affiliate of the Manager, has provided to Trust
shareholders. The Trustees acknowledged the guarantee feature and the role of an
affiliate of the Manager with regard to the guarantee.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's investment results
that, consistent with its investment objective, corresponded to the total return
performance of publicly traded common stocks represented by the S&P 500 Index,
the sensitivity to expenses of the comparative performance of the Fund, and the
Fund's net performance that was slightly lower than peer median over several
time periods considered.
The Trustees considered the cost to the Manager of the Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information that indicated that the profitability to the Manager and its
affiliates from the Management Agreement, and from the overall relationship with
the Trust, was low. The Trustees considered other benefits that the Manager and
its affiliates receive from the relationship with the Trust, including benefits
that NYLIFE Distributors and MainStay Shareholder Services receive in exchange
for services they provide to the Funds, and certain benefits from soft dollar
arrangements. The Trustees acknowledged certain benefits to the reputation of
the Manager and the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. The Trustees noted that the Fund not reached the asset
level at which breakpoints would reduce the Fund's management fee rate, that the
Fund's assets had decreased in recent years, and that the Fund can reach the
breakpoints' asset levels only through capital appreciation so long as the Fund
remains closed to new share purchases. The Trustees reviewed information about
the potential effect of asset growth on Fund expenses, the difficulty of
forecasting its effect on the profitability of the Manager and its affiliates,
and the management fee breakpoints applicable to the Fund and certain other
funds. It was noted that, to the extent the Fund's gross expenses currently were
higher than its net expenses, the reduction of the Fund's gross expenses through
the achievement of economies of scale might benefit the Manager by reducing the
expenses the Manager must reimburse to the Fund rather than directly benefiting
the Fund by reducing its net expenses. The Trustees considered information about
transfer agency expenses and their effect on the Fund's overall expenses.
www.mainstayfunds.com 27
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by the
Fund, the Trustees evaluated factors such as the fees and expenses borne by
other registered funds in the market pursuing strategies generally similar to
the Fund's. The Trustees considered certain comparative data with respect to
other registered fund clients of the Manager having investment strategies
similar to that of the Fund, and took account of explanations and other
information relating to the fees and expenses of those other funds and accounts.
The Trustees considered the current and proposed contractual and net management
fees, its anticipated gross and net expense ratio, and various components of the
expense ratio, in comparison to other funds in comparison groupings. The
Trustees generally acknowledged the historical relationship between the Manager
and the Trust and the likely difficulties in implementing an alternative to the
investment management arrangement between the Trust and the Manager. The
Trustees noted the Manager's agreement to continue to waive a certain portion of
its management fee and maintain the existing contractual limitation on the
Fund's net expenses.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings, with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreement. This summary set out
above describes the most important, but not all, of the factors considered by
the Trustees in considering the Agreement. On the basis of their review, a
majority of the Trustees and a majority of the Non-Interested Trustees concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of the Agreement, and it was the judgment of a
majority of the Trustees and a majority of the Non-Interested Trustees that
approval of the Agreement was in the best interests of the Fund and its
shareholders.
28 MainStay Equity Index Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2007,
should be multiplied by 100% to arrive at the amount eligible for qualified
dividend income, 21.4% for qualified interest income and 100% for the corporate
dividends received deduction.
In January 2008, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2007. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2007.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
or (iii) on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 1-800-MAINSTAY (1-800-624-6782). You also can obtain and review copies
of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC
(information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330).
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of The MainStay Funds (the
"Trust") was held on May 4, 2007, at the offices of New York Life Investment
Management LLC in Parsippany, New Jersey. The purpose of the meeting was to
elect the following individuals to the Board of Trustees of the Trust:
- Susan B. Kerley
- Alan R. Latshaw
- Peter Meenan
- Richard H. Nolan, Jr.
- Richard S. Trutanic
- Roman L. Weil
- John A. Weisser
- Brian A. Murdock (Interested Trustee)
There are no other Trustees of the Trust.
No other business came before the special meeting. The proposal to elect
Trustees was passed by the shareholders of the Fund as shown below:
<Table>
<Caption>
VOTES
EQUITY INDEX FUND VOTES FOR WITHHELD ABSTENTIONS TOTAL
Susan B. Kerley 5,702,702,236 20,161,595 11,383,000 5,734,246,831
- --------------------------------------------------------------------------------------
Alan R. Latshaw 5,702,807,400 20,056,431 11,383,000 5,734,246,831
- --------------------------------------------------------------------------------------
Peter Meenan 5,702,348,157 20,515,674 11,383,000 5,734,246,831
- --------------------------------------------------------------------------------------
Richard H. Nolan, Jr. 5,703,256,249 19,607,582 11,383,000 5,734,246,831
- --------------------------------------------------------------------------------------
Richard S. Trutanic 5,702,726,118 20,137,713 11,383,000 5,734,246,831
- --------------------------------------------------------------------------------------
Roman L. Weil 5,703,144,679 19,719,152 11,383,000 5,734,246,831
- --------------------------------------------------------------------------------------
John A. Weisser 5,701,259,494 21,604,337 11,383,000 5,734,246,831
- --------------------------------------------------------------------------------------
Brian A. Murdock 5,702,874,129 19,989,702 11,383,000 5,734,246,831
- --------------------------------------------------------------------------------------
</Table>
This resulted in approval of the proposal.
www.mainstayfunds.com 29
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Pursuant to
notice, a Special Meeting of Shareholders of the Trust was held on May 4, 2007,
at NYLIM's offices in Parsippany, New Jersey. The Trustees listed below were
elected to serve the Trust effective June 7, 2007.
Each Trustee serves until his or her successor is elected and qualified or until
his or her resignation, death or removal. The Retirement Policy provides that a
Trustee shall tender his or her resignation upon reaching age 72. A Trustee
reaching the age of 72 may continue for additional one-year periods with the
approval of the Board's Nominating and Governance Committee, except that no
Trustee shall serve on the Board past his or her 75th birthday. Officers serve a
term of one year and are elected annually by the Trustees. The business address
of each Trustee and officer listed below is 51 Madison Avenue, New York, New
York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF FUNDS
POSITION(S) HELD IN FUND COMPLEX
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
BRIAN A. MURDOCK Indefinite; Member of the Board of Managers 73 Trustee, Eclipse Funds since
3/14/56 Trustee and Chief and President (since 2004) and June, 2007 (3 funds); Director,
Executive Officer Chief Executive Officer (since Eclipse Funds Inc. since June
since 2006 2006), New York Life Investment 2007 (22 funds); Director,
Management LLC and New York MainStay VP Series Fund, Inc.,
Life Investment Management since 2006 (24 portfolios);
Holdings LLC; Senior Vice Director, ICAP Funds, Inc.,
President, New York Life since 2006 (3 funds)
Insurance Company (since 2004);
Chairman of the Board and
President, NYLIFE Distributors
LLC (since 2004); Member of the
Board of Managers, NYLCAP
Manager LLC and Madison Capital
Funding LLC (since 2004),
MacKay Shields LLC and
Institutional Capital LLC
(since 2006), and McMorgan &
Company LLC (since 2007); Chief
Executive Officer, Eclipse
Funds and Eclipse Funds Inc.
(since 2006); Chairman (2006 to
2007) and Director and Chief
Executive Officer (since 2006),
MainStay VP Series Fund, Inc.;
Director and Chief Executive
Officer, ICAP Funds, Inc.
(since 2006); Chief Investment
Officer, MLIM Europe and Asia
(2001 to 2003); President of
Merrill Japan and Chairman of
MLIM's Pacific Region (1999 to
2001)
-----------------------------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow Capital
Management, Inc., McMorgan & Company LLC, NYLIFE Securities Inc. and/or NYLIFE
Distributors LLC, as described in detail above in the column "Principal
Occupation(s) During Past Five Years."
30 MainStay Equity Index Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. KERLEY Indefinite; Partner, Strategic Management 73 Chairman since 2005 and Trustee
8/12/51 Chairman and Advisors LLC (since 1990) since 2000, Eclipse Funds (3
Trustee since funds); Chairman since 2005 and
June 2007 Director since 1990, Eclipse
Funds Inc. (22 funds); Chairman
and Director, ICAP Funds, Inc.,
since 2006 (3 funds); Chairman
and Director, MainStay VP
Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
Legg Mason Partners Funds,
Inc., since 1991 (30
portfolios)
----------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & Young 73 Trustee, Eclipse Funds since
3/27/51 Trustee and Audit LLP (2002 to 2003); Partner, June 2007 (3 funds); Director,
Committee Arthur Andersen LLP (1989 to Eclipse Funds Inc. since June
Financial Expert 2002); Consultant to the Audit 2007 (22 funds); Director, ICAP
since 2006 and Compliance Committee of The Funds, Inc., since June 2007 (3
MainStay Funds (2004 funds); Director, MainStay VP
to 2006) Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
State Farm Associates Funds
Trusts since 2005 (3
portfolios); Trustee, State
Farm Mutual Fund Trust since
2005 (15 portfolios); Trustee,
State Farm Variable Product
Trust since 2005 (9 portfolios)
----------------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds since
12/5/41 Trustee since President and Chief Executive 2002 (3 funds); Director,
June 2007 Officer, Babson-United, Inc. Eclipse Funds Inc. since 2002
(financial services firm) (2000 (22 funds); Director, ICAP
to 2004); Independent Funds, Inc., since 2006 (3
Consultant (1999 to 2000); Head funds); Director, MainStay VP
of Global Funds, Citicorp (1995 Series Fund, Inc., since June
to 1999) 2007 (24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 73 Trustee, Eclipse Funds since
NOLAN, JR. Trustee since Management; President--Shields/ June 2007 (3 funds); Director,
11/16/46 June 2007 Alliance, Alliance Capital Eclipse Funds Inc. since June
Management (1994 to 2004) 2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 2006
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman (since 1990) and Chief 73 Trustee, Eclipse Funds since
TRUTANIC Trustee since Executive Officer (1990 to June 2007 (3 funds); Director,
2/13/52 1994 1999), Somerset Group Eclipse Funds Inc. since June
(financial advisory firm); 2007 (22 funds); Director, ICAP
Managing Director and Advisor, Funds, Inc., since June 2007 (3
The Carlyle Group (private funds); Director, MainStay VP
investment firm) (2002 to Series Fund, Inc., since June
2004); Senior Managing Director 2007 (24 portfolios)
and Partner, Groupe Arnault
S.A. (private investment firm)
(1999 to 2002)
----------------------------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 31
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
ROMAN L. WEIL Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds since
5/22/40 Trustee and Audit Accounting, Graduate School of June 2007 (3 funds); Director,
Committee Business, University of Eclipse Funds Inc. since June
Financial Expert Chicago; President, Roman L. 2007 (22 funds); Director, ICAP
since June 2007 Weil Associates, Inc. Funds, Inc., since June 2007 (3
(consulting firm) funds); Director, MainStay VP
Series Fund, Inc., since 1994
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 73 Trustee, Eclipse Funds since
10/22/41 Trustee since Salomon Brothers, Inc. (1971 to June 2007 (3 funds); Director,
June 2007 1995) Eclipse Funds Inc. since June
2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 1997
(24 portfolios); Trustee,
Direxion Funds (69 funds) and
Direxion Insurance Trust (45
funds) since March 2007
----------------------------------------------------------------------------------------------------------------------
</Table>
Terry L. Lierman resigned as Trustee of the Trust effective May 31, 2007. Edward
J. Hogan, John B. McGuckian and Donald E. Nickelson resigned as Trustees of the
Trust effective June 7, 2007.
At a meeting of the Board of Trustees held on June 7 and 8, 2007, the following
individuals were appointed to serve as Officers of the Trust effective June 7,
2007:
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ROBERT A. Chief Legal Senior Managing Director, General Counsel and Secretary, New
ANSELMI Officer since York Life Investment Management LLC (including predecessor
10/19/46 2004 advisory organizations) (since 2000); Secretary (since 2001)
and General Counsel (since 2004), New York Life Investment
Management Holdings LLC; Senior Vice President, New York
Life Insurance Company (since 2000); Vice President and
Secretary, McMorgan & Company LLC (since 2001); Secretary,
NYLIM Service Company LLC (since 2005), NYLCAP Manager LLC
(since 2004), Madison Capital Funding LLC (since 2002), and
Institutional Capital LLC (since 2006); Chief Legal Officer,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), McMorgan Funds (since 2005) and
ICAP Funds, Inc. (since 2006); Managing Director and Senior
Counsel, Lehman Brothers Inc. (1998 to 1999); General
Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998)
-------------------------------------------------------------------------------------------------
JACK R. Treasurer and Managing Director, New York Life Investment Management LLC
BENINTENDE Principal (since June 2007); Treasurer and Principal Financial and
5/12/64 Financial and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
Accounting MainStay VP Series Fund, Inc., and ICAP Funds, Inc. (since
Officer since June 2007); Vice President, Prudential Investments (2000 to
June 2007 2007); Assistant Treasurer, JennisonDryden Family of Funds,
Target Portfolio Trust, The Prudential Series Fund and
American Skandia Trust (2006 to 2007); Treasurer and
Principal Financial Officer, The Greater China
Fund (2007)
-------------------------------------------------------------------------------------------------
STEPHEN P. President since Senior Managing Director and Chief Marketing Officer, New
FISHER March 2007 York Life Investment Management LLC (since 2005); Managing
2/22/59 Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since March 2007); Managing Director, UBS
Global Asset Management (1999 to 2003)
-------------------------------------------------------------------------------------------------
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration predecessor advisory organizations) (since 2000); Executive
2/8/59 since 2005 Vice President, New York Life Trust Company (since 2006);
Vice President--Administration, Eclipse Funds, Eclipse Funds
Inc. and MainStay VP Series Fund, Inc. (since 2005) and ICAP
Funds, Inc. (since 2006)
-------------------------------------------------------------------------------------------------
</Table>
32 MainStay Equity Index Fund
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Senior Managing Director and Chief Compliance Officer (since
MICUCCI President and 2006) and Managing Director and Chief Compliance Officer
12/16/65 Chief Compliance (2003 to 2006), New York Life Investment Management LLC and
Officer since New York Life Investment Management Holdings LLC; Senior
2006 Managing Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE Distributors
LLC; Chief Compliance Officer, NYLCAP Manager LLC (since
2006); Senior Vice President and Chief Compliance Officer,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund,
Inc., and ICAP Funds, Inc. (since 2006); Vice President--
Compliance, Eclipse Funds, Eclipse Funds Inc. and MainStay
VP Series Fund, Inc. (2004 to 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002)
-------------------------------------------------------------------------------------------------
MARGUERITE E.H. Secretary since Managing Director and Associate General Counsel, New York
MORRISON* 2004 Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC (since
2005); Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP Funds,
Inc. (since 2006); Chief Legal Officer--Mutual Funds and
Vice President and Corporate Counsel, The Prudential
Insurance Company of America (2000 to 2004)
-------------------------------------------------------------------------------------------------
</Table>
* In addition to serving as Secretary to the Trust, effective January 1, 2008,
Marguerite E.H. Morrison will assume the role of Chief Legal Officer to the
Trust.
Arphiela Arizmendi resigned as Treasurer and Principal Financial and Accounting
Officer of the Trust effective June 7, 2007.
Christopher O. Blunt resigned as President of the Trust effective March 12,
2007.
Alan J. Kirshenbaum resigned as Senior Vice President of the Trust effective
March 19, 2007.
www.mainstayfunds.com 33
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay 130/30 Core Fund
MainStay 130/30 Growth Fund
MainStay All Cap Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay 130/30 High Yield Fund(2)
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Institutional Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Principal Preservation Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay 130/30 International Fund
MainStay Global High Income Fund
MainStay ICAP International Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
RETIREMENT FUNDS
MainStay Retirement 2010 Fund
MainStay Retirement 2020 Fund
MainStay Retirement 2030 Fund
MainStay Retirement 2040 Fund
MainStay Retirement 2050 Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
New York, New York
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
Chicago, Illinois
MACKAY SHIELDS LLC(3)
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
MCMORGAN & COMPANY LLC(3)
San Francisco, California
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
(NEW YORK LIFE INVESTMENT MANAGEMENT LLC LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2007 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO11872
(RECYCLE LOGO) MS329-07 MSEI11-12/07
06
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
GLOBAL HIGH INCOME FUND
Message from the President
and
Annual Report
October 31, 2007
MESSAGE FROM
THE PRESIDENT
The 12-month period ended October 31, 2007, was a dynamic one for mutual fund
investors. U.S. equity markets generally advanced, with growth stocks out-
performing value stocks at all capitalization levels. Although past performance
is no guarantee of future results, international stocks as a whole provided even
stronger returns for U.S. investors.
The progress of the equity markets, however, was far from steady. In February,
weakness in Asian markets led to sharp price declines around the globe. The
correction caused many investors to reconsider whether China and other emerging
economies could sustain their rapid growth. Fortunately, strong
corporate-earnings reports and positive economic news helped the stock market
regain its footing.
In July and August, difficulties in the subprime-mortgage market led to another
stock-market correction. A number of high-profile mortgage originators either
closed their doors or were sold to larger entities. Other leading financial
services firms faced major write-offs because of subprime-mortgage exposure.
The Federal Open Market Committee (FOMC) took prompt action to increase
liquidity and stabilize the financial markets by lowering the discount rate and
the federal funds target rate during the reporting period. These Federal Reserve
moves helped calm investor concerns, and the stock market generally advanced
from August 16, 2007, the date of an unscheduled FOMC meeting, through the end
of October 2007.
Difficulties in the subprime-mortgage market led to a "flight to quality," or a
general movement toward fixed-income securities that carry lower risk. As demand
for short- and intermediate-term Treasury securities increased, yields fell
across much of the maturity spectrum. Yields rose, however, on 20-and 30-year
Treasury bonds, and the yield curve steepened during the 12-month reporting
period.
High-yield bonds rallied from November 2006 through May 2007. But in June and
July, the yield differences--or spreads--between high-yield bonds and comparable
Treasury securities began to widen. At the end of October 2007, these spreads
were wider than when the reporting period began, making high-yield securities
more attractive to investors willing to accept higher risk.
To help investors address the challenges of today's ever-changing markets, New
York Life Investment Management LLC provides access to seven institutional
investment boutiques, each with its own proprietary research and investment
culture. As advisors and subadvisors to MainStay Funds, these boutiques bring a
wealth of experience and market insight to our shareholders. The portfolio
managers of each MainStay Fund seek to consistently apply time-tested investment
principles across a wide variety of market environments.
The report that follows provides more specific information about the market
forces and investment decisions that affected your investment in MainStay Funds
from November 1, 2006, through October 31, 2007. Please read the report
carefully. As you do, bear in mind that this annual report reflects just a short
segment of your lifetime investment journey. We look forward to continuing to
work with you, wherever that journey may lead.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
GLOBAL HIGH INCOME FUND
MainStay Funds
Annual Report
October 31, 2007
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 16
- --------------------------------------------------------------------------------
Notes to Financial Statements 22
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 30
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 31
- --------------------------------------------------------------------------------
Federal Income Tax Information 33
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 33
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 33
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 33
- --------------------------------------------------------------------------------
Trustees and Officers 34
</Table>
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT
MONTH-END PERFORMANCE INFORMATION, PLEASE CALL 1-800-MAINSTAY (1-800-624-6782)
OR VISIT WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES--MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL TOTAL ONE FIVE SINCE
RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 3.24% 14.27% 10.22%
Excluding sales charges 8.11 15.33 10.76
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY GLOBAL HIGH INCOME JPMORGAN EMBI GLOBAL
FUND DIVERSIFIED INDEX
--------------------------- --------------------
6/1/98 9550.00 10000.00
7473.00 8448.00
8831.00 10085.00
10016.00 11598.00
10825.00 12975.00
12269.00 14248.00
16283.00 17654.00
18605.00 19857.00
20718.00 21879.00
23152.00 24337.00
10/31/07 25029.00 26216.00
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL TOTAL ONE FIVE SINCE
RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 2.29% 14.22% 9.91%
Excluding sales charges 7.28 14.46 9.91
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY GLOBAL HIGH INCOME JPMORGAN EMBI GLOBAL
FUND DIVERSIFIED INDEX
--------------------------- --------------------
6/1/98 10000.00 10000.00
7789.00 8448.00
9120.00 10085.00
10271.00 11598.00
11018.00 12975.00
12406.00 14248.00
16336.00 17654.00
18519.00 19857.00
20486.00 21879.00
22713.00 24337.00
10/31/07 24368.00 26216.00
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL TOTAL ONE FIVE SINCE
RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 6.28% 14.46% 9.91%
Excluding sales charges 7.28 14.46 9.91
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY GLOBAL HIGH INCOME JPMORGAN EMBI GLOBAL
FUND DIVERSIFIED INDEX
--------------------------- --------------------
6/1/98 10000.00 10000.00
7789.00 8448.00
9120.00 10085.00
10271.00 11598.00
11018.00 12975.00
12406.00 14248.00
16336.00 17654.00
18519.00 19857.00
20486.00 21879.00
22713.00 24337.00
10/31/07 24367.00 26216.00
</Table>
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect maximum applicable sales charges explained in this paragraph, change in
share price, and reinvestment of dividend and capital-gain distributions. The
graphs assume an initial investment of $10,000 and reflect the deduction of all
sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 4.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase and have an annual 12b-1 fee of 1.00%.
Performance figures reflect certain fee waivers and/or expense limitations,
without which total returns may have been lower. These fee waivers and/or
expense limitations are contractual and may be modified or terminated only with
the approval of the Board of Trustees. The Manager may recoup the amount of
certain management fee waivers or expense reimbursements from the Fund pursuant
to the contract if such action does not cause the Fund to exceed existing
expense limitations and the recoupment is made within three years after the year
in which the Manager incurred the expense. From inception (6/1/98) through
8/31/98, performance of Class C shares (first offered 9/1/98) includes the
historical performance of Class B shares adjusted to reflect the applicable
CDSC, estimated expenses, and fee waivers/expense limitations of Class C shares
upon initial offer. From inception (6/1/98) through 10/31/07, the performance of
Class I shares (first offered 8/31/07) includes the historical performance of
Class A shares adjusted to reflect the fees and expenses for Class I shares.
Unadjusted, the performance shown for the newer classes of shares might have
been lower.
THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS AND
SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
7.84% 15.50% 10.98%
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
JPMORGAN EMBI GLOBAL
CLASS I DIVERSIFIED INDEX
------- --------------------
6/1/98 10000.00 10000.00
7833.00 8448.00
9280.00 10085.00
10552.00 11598.00
11432.00 12975.00
12990.00 14248.00
17283.00 17654.00
19797.00 19857.00
22100.00 21879.00
24759.00 24337.00
10/31/07 26700.00 26216.00
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
- -----------------------------------------------------------------------
JPMorgan EMBI Global Diversified Index(1) 7.72% 12.97% 10.77%
Average Lipper emerging markets debt
fund(2) 9.53 15.46 11.05
</Table>
1. The JPMorgan Emerging Markets Bond Index Global Diversified, which we refer
to as the JPMorgan EMBI Global Diversified Index, is an unmanaged, uniquely
weighted version of the JPMorgan Emerging Markets Bond Index Global. The
JPMorgan Emerging Markets Bond Index Global is an unmanaged index that tracks
total returns for U.S. dollar denominated debt instruments--Brady bonds,
loans and Eurobonds--issued by emerging-market sovereign and quasi-sovereign
entities. The JPMorgan EMBI Global Diversified Index limits the weights of
those index countries with larger debt stocks by only including specified
portions of these countries' eligible current face amounts of debt
outstanding. Results assume reinvestment of all income and capital gains. The
JPMorgan EMBI Global Diversified Index is considered to be the Fund's
broad-based securities-market index for comparison purposes. An investment
cannot be made directly in an index.
2. Lipper Inc. is an independent monitor of fund performance. Results are based
on total returns with all dividend and capital-gain distributions reinvested.
THE DISCLOSURE ON THE PRECEDING PAGE IS AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Global High Income Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY GLOBAL HIGH INCOME FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2007, to October 31, 2007,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1,
2007, to October 31, 2007.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six-months ended October 31, 2007. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/07 10/31/07 PERIOD(1) 10/31/07 PERIOD(1)
CLASS A SHARES $1,000.00 $1,017.40 $ 7.12 $1,018.00 $ 7.12
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,012.95 $10.91 $1,014.25 $10.92
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,012.85 $10.91 $1,014.25 $10.92
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES(2) $1,000.00 $1,020.60 $ 1.85 $1,006.12 $ 1.83
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's net annualized expense ratio of each class
(1.40% for Class A, 2.15% for Class B and Class C, and 1.15% for Class I)
multiplied by the average account value over the period, divided by 365 and
multiplied by 184 (to reflect the one-half year period).
2. Shares were first offered on August 31, 2007. Expenses paid during the period
reflect ongoing costs for the since-inception period ending October 31, 2007.
Had these shares been offered for the six months ended October 31, 2007, and
had the Fund provided a hypothetical 5% annualized return, expenses paid
during the period would have been $5.85 and the ending account value would
have been $1,019.25.
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2007
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Governments & Federal Agencies 72.10
Corporate Bonds 22.80
Short-Term Investments (collateral from securities lending 5.00
is 3.4%)
Yankee Bond 0.40
Purchased Call Option 0.00*
Purchased Put Option 0.00*
Liabilities in Excess of Cash and Other Assets (0.30)
</Table>
* Less than one-tenth of a percent.
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2007 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Federal Republic of Brazil, 8.25%, due 1/20/34
2. Republic of Peru, 7.35%, due 7/21/25
3. Republic of Argentina, 8.28%, due 12/31/33
4. Republic of Philippines, 9.50%, due 2/2/30
5. Republic of Uruguay, 7.875%, due 1/15/33
6. Federal Republic of Brazil, 8.00%, due 1/15/18
7. United Mexican States, 8.125%, due 12/30/19
8. Republic of Argentina, (zero coupon), due
12/15/35
9. Republic of Venezuela, 9.25%, due 9/15/27
10. Republic of Turkey, 7.375%, due 2/5/25
</Table>
8 MainStay Global High Income Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Gary Goodenough, Joseph Portera and
Jeffrey H. Saxon of MacKay Shields LLC
HOW DID MAINSTAY GLOBAL HIGH INCOME FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2007?
Excluding all sales charges, MainStay Global High Income Fund returned 8.11% for
Class A shares, 7.28% for Class B shares and 7.28% for Class C shares for the 12
months ended October 31, 2007. Over the same period, the Fund's Class I shares
returned 7.84%. All share classes underperformed the 9.53% return of the average
Lipper(1) emerging markets debt fund for the 12-month reporting period. Class A
and Class I shares outperformed--and Class B and Class C shares
underperformed--the 7.72% return of the JPMorgan EMBI Global Diversified
Index,(2) the Fund's broad-based securities-market index, for the 12 months
ended October 31, 2007. See page 5 for Fund returns with sales charges.
WHAT FACTORS AFFECTED THE MANAGEMENT AND PERFORMANCE OF THE FUND DURING THE
REPORTING PERIOD?
Events in developed markets--including lower interest rates in the United
States, higher commodity prices and G7 economic activity--had a substantial
impact on emerging-market debt during the reporting period.
Early in the reporting period, we made a strategic decision to increase the
Fund's exposure to local currency debt. The decision--which was based on a
reduction of the spread in U.S. dollar bonds, strong trade and current-account
performance--contributed positively to the Fund's performance, as the U.S.
dollar showed a weakening bias for most of the reporting period.
Several other factors influenced emerging-market debt prices and Fund
performance during the reporting period. Subprime-mortgage woes led to spread
widening, and we used this as an opportunity to add credits with higher
volatility than the market as a whole. The Federal Open Market Committee decided
to cut the targeted federal funds rate in September and again at the end of
October 2007. These moves helped the Fund's performance, because yields retraced
some of the widening that had occurred in July and August. Higher commodity
prices led us to increase the Fund's exposure to the debt securities of
countries that export oil or have metals & mining interests.
HOW DID THE FUND'S LATIN AMERICAN HOLDINGS PERFORM?
Ecuador dollar bonds were strong performers when it became evident that the new
president would not attempt to renegotiate external debt. We sold the Fund's
Ecuador bonds at a profit early in 2007. Among higher-risk credits in our
investment universe, we showed a preference for Venezuelan bonds. We took
advantage of the summer turmoil to add sovereign exposure, and toward the end of
the period, the Fund added securities of Venezuela's state-owned oil company.
Brazilian sovereign debt performed well, propelled by strong economic growth,
fiscal discipline and a stable political environment. We increased the Fund's
overweight allocation to Brazilian debt, adding both local currency and U.S.
dollar denominated government and corporate debt. In most cases, these holdings
helped Fund returns. The exceptions were Brazilian airline bonds, which were the
worst-performing corporate debt in the Fund's portfolio. Following a major plane
crash in Sao Paolo, Brazil, local carriers TAM Capital and GOL Linhas Aereas
Inteligentes came under heavy selling pressure. We had sold the Fund's position
in GOL earlier in the year, which helped mitigate the negative effect of these
airline bonds on the Fund's performance.
Class I shares commenced operations on August 31, 2007.
Foreign securities may be subject to greater risks than U.S. investments,
including currency fluctuations, less-liquid trading markets, greater price
volatility, political and economic instability, less publicly available
information, and changes in tax or currency laws or monetary policy. These risks
are likely to be greater in emerging markets than in developed markets.
High-yield securities ("junk bonds") are generally considered speculative
because they present a greater risk of loss than higher-quality debt securities
and may be subject to greater price volatility. The Fund may invest in
derivatives, which may increase the volatility of the Fund's net asset value and
may result in a loss to the Fund. Funds that invest in bonds are subject to
credit, inflation, and interest-rate risk and can lose principal value when
interest rates rise. The Fund may experience a portfolio turnover rate of more
than 100% and may generate taxable short-term capital gains. The Fund is
nondiversified. By concentrating in a smaller number of investments, the Fund's
risk is increased because each investment has a greater effect on the Fund's
performance.
1. See footnote on page 6 for more information on Lipper Inc.
2. See footnote on page 6 for more information on the JPMorgan EMBI Global
Diversified Index.
3. The terms "spread" and "yield spread" may refer to the difference in yield
between a security or type of security and comparable U.S. Treasury issues.
The term may also refer to the difference in yield between two specific
securities or types of securities at a given time.
www.mainstayfunds.com 9
WAS THE FUND INVESTED IN BANK DEBT DURING THE REPORTING PERIOD?
Historically, the Fund has not been a major buyer of bank debt. For bank debt to
be attractive, we need to feel comfortable with the sector and with the
regulatory framework. Kazakhstan bank paper met our criteria, and we purchased
it from a number of issuers early in the reporting period. The relative
performance of this bank paper was mixed. One of the Fund's holdings, ATF Bank,
was bought by an Italian bank and performed well. We added to the position
toward the end of the reporting period. The Fund's other Kazakhstan bank
holdings got caught in the global credit squeeze, and spreads widened
dramatically. We held on to these positions, however, expecting the nation's
central bank to support liquidity. We believed that at least one of these
holdings could be a potential takeover target.
WERE THERE ANY SIGNIFICANT CHANGES IN THE FUND'S COUNTRY OR REGIONAL WEIGHTINGS
DURING THE REPORTING PERIOD?
We gradually reduced the Fund's exposure to Russian sovereign debt during the
reporting period. We added Asian debt, mainly Chinese corporate issuers, to the
Fund during the 12 months ended October 31, 2007.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecast
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
10 MainStay Global High Income Fund
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2007
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (95.3%)+
CORPORATE BONDS (22.8%)
- ----------------------------------------------------------------------------------
ARGENTINA (0.2%)
Telecom Personal S.A.
9.25%, due 12/22/10 (a) $ 500,000 $ 510,500
------------
BAHAMAS (0.2%)
Ultrapetrol, Ltd.
9.00%, due 11/24/14 450,000 441,000
------------
BERMUDA (1.8%)
AES China Generating Co., Ltd.
8.25%, due 6/26/10 550,000 543,703
Asia Aluminum Holdings, Ltd.
8.00%, due 12/23/11 (a) 500,000 485,650
Series Reg S
8.00%, due 12/23/11 985,000 955,450
Citic Resources Finance, Ltd.
6.75%, due 5/15/14 (a) 1,475,000 1,416,000
Hopson Development Holdings, Ltd.
8.125%, due 11/9/12 (a) 400,000 385,000
Shanghai Real Estate, Ltd.
8.625%, due 4/24/13 250,000 231,207
------------
4,017,010
------------
BRAZIL (1.8%)
Braskem S.A.
9.375%, due 6/1/15 (a) 150,000 168,750
Series Reg S
9.375%, due 6/1/15 800,000 900,000
Companhia Brasileira de Bebidas
9.50%, due 7/24/17 (a) BRL 2,250,000 1,176,581
Companhia de Saneamento Basico do Estado de Sao
Paulo
7.50%, due 11/3/16 (a) $ 630,000 654,444
ISA Capital do Brasil S.A.
8.80%, due 1/30/17 (a) 350,000 364,000
TAM Capital, Inc.
7.375%, due 4/25/17 (a) 700,000 626,500
------------
3,890,275
------------
CANADA (0.1%)
Export Development Canada
13.00%, due 8/11/08 ISK 12,700,000 $ 211,224
------------
CAYMAN ISLANDS (2.8%)
Banco Mercantil del Norte S.A.
Series Reg S
5.875%, due 2/17/14 $ 400,000 397,000
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CAYMAN ISLANDS (CONTINUED)
Cosan Finance, Ltd.
7.00%, due 2/1/17 (a) $ 1,845,000 $ 1,775,813
Shimao Property Holdings, Ltd.
8.00%, due 12/1/16 (a) 100,000 97,750
Vale Overseas, Ltd.
6.25%, due 1/11/16 650,000 662,462
6.25%, due 1/23/17 1,430,000 1,445,893
6.875%, due 11/21/36 880,000 914,798
8.25%, due 1/17/34 190,000 228,043
Xinao Gas Holdings, Ltd.
7.375%, due 8/5/12 545,000 563,422
------------
6,085,181
------------
CHILE (0.3%)
AES Gener S.A.
7.50%, due 3/25/14 550,000 572,827
------------
COLOMBIA (0.3%)
AES Chivor S.A. E.S.P.
9.75%, due 12/30/14 (a) 500,000 550,000
------------
GERMANY (0.5%)
Kreditanstalt fuer Wiederaufbau
Series E
11.75%, due 8/8/08 ISK 68,000,000 1,124,696
------------
HONG KONG (0.2%)
Panva Gas Holdings, Ltd.
8.25%, due 9/23/11 $ 500,000 532,491
------------
LUXEMBOURG (4.7%)
Evraz Group S.A.
8.25%, due 11/10/15 (a) 865,000 876,894
Gazprom International S.A.
7.201%, due 2/1/20 (a) 2,216,158 2,277,102
Norilsk Nickel Finance Luxembourg S.A.
7.125%, due 9/30/09 700,000 719,411
OJSC Russian Agricultural Bank
7.175%, due 5/16/13 (a) 300,000 309,420
OJSC Vimpel Communications
8.25%, due 5/23/16 (a) 900,000 931,500
8.25%, due 5/23/16 500,000 517,500
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ----------------------------------------------------------------------------------
LUXEMBOURG (CONTINUED)
Tengizchevroil Finance Co. S.A.R.L.
6.124%, due 11/15/14 (a) $ 320,000 $ 307,200
TNK-BP Finance S.A.
7.50%, due 7/18/16 (a) 980,000 955,500
7.875%, due 3/13/18 (a) 3,500,000 3,460,625
------------
10,355,152
------------
MEXICO (1.6%)
America Movil S.A. de C.V.
5.50%, due 3/1/14 400,000 399,000
Series Reg S
8.46%, due 12/18/36 (a) MXN 8,000,000 741,384
Controladora Mabe S.A. de C.V.
6.50%, due 12/15/15 (a) $ 250,000 253,750
6.50%, due 12/15/15 280,000 284,200
Desarrolladora Homex S.A. de C.V.
7.50%, due 9/28/15 100,000 101,500
Grupo Gigante S.A. de C.V.
8.75%, due 4/13/16 (a)(b) 1,200,000 1,248,000
Grupo Televisa S.A. de C.V.
8.49%, due 5/11/37 MXN 6,000,000 555,512
------------
3,583,346
------------
NETHERLANDS (2.8%)
ATF Capital B.V.
9.25%, due 2/21/14 (a) $ 2,100,000 2,163,000
Electricidad de Caracas Finance B.V.
10.25%, due 10/15/14 (a) 200,000 204,000
Excelcomindo Finance Co. B.V.
7.125%, due 1/18/13 (a) 300,000 298,500
Intergas Finance B.V.
6.375%, due 5/14/17 (a) 500,000 467,500
6.875%, due 11/4/11 (a) 570,000 574,988
Lukoil International Finance B.V.
6.356%, due 6/7/17 (a) 675,000 649,688
Majapahit Holdings B.V.
7.75%, due 10/17/16 (a) 100,000 103,130
Paiton Energy Funding B.V.
9.34%, due 2/15/14 (a) 500,000 513,150
Series Reg S
9.34%, due 2/15/14 550,000 563,750
Temir Capital B.V.
9.50%, due 5/21/14 (a) 400,000 333,000
TuranAlem Finance B.V.
7.75%, due 4/25/13 (a) 300,000 267,000
------------
6,137,706
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
PANAMA (0.1%)
AES El Salvador Trust
6.75%, due 2/1/16 (a) $ 300,000 $ 299,340
------------
PHILIPPINES (0.2%)
National Power Corp.
6.875%, due 11/2/16 (a)(b) 300,000 307,125
Philippine Long Distance Telephone Co.
8.35%, due 3/6/17 70,000 78,050
------------
385,175
------------
RUSSIA (0.9%)
NPC Irkut
8.25%, due 4/10/09 750,000 746,250
OAO Gazprom
9.625%, due 3/1/13 (a) 1,000,000 1,152,500
------------
1,898,750
------------
SOUTH KOREA (0.7%)
C&M Finance, Ltd.
8.10%, due 2/1/16 (a) 500,000 490,000
Hynix Semiconductor, Inc.
7.875%, due 6/27/17 (a) 1,100,000 1,047,750
------------
1,537,750
------------
UNITED ARAB EMIRATES (1.0%)
DP World, Ltd.
6.85%, due 7/2/37 (a) 2,150,000 2,158,441
------------
UNITED KINGDOM (0.2%)
GTL Trade Finance, Inc.
7.25%, due 10/20/17 (a) 500,000 506,369
------------
UNITED STATES (2.2%)
GMAC LLC
6.00%, due 12/15/11 1,600,000 1,419,610
Pemex Project Funding Master Trust
7.375%, due 12/15/14 2,960,000 3,279,280
------------
4,698,890
------------
VENEZUELA (0.2%)
Petroleos de Venezuela
5.50%, due 4/12/37 515,000 320,588
------------
Total Corporate Bonds
(Cost 49,467,733) 49,816,711
------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
12 MainStay Global High Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
GOVERNMENTS & FEDERAL AGENCIES (72.1%)
- ----------------------------------------------------------------------------------
ARGENTINA (6.6%)
Republic of Argentina
V (zero coupon), due 12/15/35 (c) $ 37,229,323 $ 5,119,032
1.33%, due 12/31/38
2.50%, beginning 3/1/09,
3.75%, beginning 3/1/19,
5.25%, beginning 3/1/29 1,000,000 467,500
5.389%, due 8/3/12 (c)(d) 1,700,000 1,569,440
V 8.28%, due 12/31/33 7,283,451 7,374,494
------------
14,530,466
------------
BRAZIL (15.4%)
Federal Republic of Brazil
V 8.00%, due 1/15/18 (b) 4,951,000 5,545,120
V 8.25%, due 1/20/34 9,885,000 12,810,960
Series B
8.875%, due 4/15/24 1,475,000 1,943,313
9.25%, due 10/22/10 1,160,000 1,305,000
10.125%, due 5/15/27 1,500,000 2,217,000
10.50%, due 7/14/14 1,230,000 1,572,555
11.00%, due 1/11/12 2,500,000 3,057,500
12.25%, due 3/6/30 1,140,000 2,012,100
12.50%, due 1/5/22 BRL 4,750,000 3,190,636
------------
33,654,184
------------
COLOMBIA (3.9%)
Republic of Colombia
7.33%, due 11/16/15 (c) $ 500,000 525,000
8.125%, due 5/21/24 2,830,000 3,403,075
10.00%, due 1/23/12 1,000,000 1,165,000
10.375%, due 1/28/33 500,000 756,250
11.75%, due 2/25/20 430,000 641,775
12.00%, due 10/22/15 CP3,470,000,000 1,975,984
------------
8,467,084
------------
COSTA RICA (0.3%)
Republic of Costa Rica
Series Reg S
8.11%, due 2/1/12 $ 500,000 546,250
------------
DOMINICAN REPUBLIC (0.6%)
Dominican Republic
9.04%, due 1/23/18 (a) 655,786 754,154
Series Reg S
9.04%, due 1/23/18 546,488 628,462
------------
1,382,616
------------
EGYPT (1.2%)
Republic of Egypt
(zero coupon), due 1/15/08 EGP 4,400,000 $ 786,952
(zero coupon), due 2/12/08 9,975,000 1,774,402
------------
2,561,354
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
EL SALVADOR (0.2%)
Republic of El Salvador
7.75%, due 1/24/23 (a) $ 100,000 116,000
Series Reg S
7.75%, due 1/24/23 100,000 116,000
8.25%, due 4/10/32 (a) 250,000 305,000
------------
537,000
------------
INDONESIA (1.9%)
Republic of Indonesia
6.625%, due 2/17/37 (a) 2,000,000 1,967,500
6.875%, due 3/9/17 (a)(b) 1,100,000 1,157,750
7.25%, due 4/20/15 (a)(b) 550,000 589,875
Series Reg S
7.25%, due 4/20/15 500,000 536,851
------------
4,251,976
------------
JAMAICA (0.3%)
Jamaica Government
8.00%, due 3/15/39 600,000 588,000
------------
LEBANON (0.7%)
Republic of Lebanon
Series Reg S
8.25%, due 4/12/21 1,650,000 1,505,625
------------
MEXICO (2.7%)
United Mexican States
5.625%, due 1/15/17 250,000 253,625
7.25%, due 12/15/16 MXN 6,100,000 547,956
V 8.125%, due 12/30/19 $ 4,150,000 5,129,400
------------
5,930,981
------------
PAKISTAN (0.3%)
Islamic Republic of Pakistan
6.875%, due 6/1/17 (a) 700,000 637,000
------------
PANAMA (3.8%)
Republic of Panama
6.70%, due 1/26/36 558,000 585,900
7.125%, due 1/29/26 925,000 1,019,813
8.875%, due 9/30/27 920,000 1,193,700
9.375%, due 7/23/12 350,000 403,375
9.375%, due 4/1/29 3,455,000 4,698,800
9.625%, due 2/8/11 462,000 519,750
------------
8,421,338
------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
GOVERNMENTS & FEDERAL AGENCIES (CONTINUED)
- ----------------------------------------------------------------------------------
PERU (5.0%)
Republic of Peru
V 7.35%, due 7/21/25 $ 7,535,000 $ 8,646,413
8.75%, due 11/21/33 1,762,000 2,352,270
------------
10,998,683
------------
PHILIPPINES (6.2%)
Republic of Philippines
7.75%, due 1/14/31 1,400,000 1,596,000
8.00%, due 1/15/16 650,000 736,125
9.375%, due 1/18/17 830,000 1,027,125
V 9.50%, due 2/2/30 (b) 4,660,000 6,261,875
9.875%, due 1/15/19 (b) 1,670,000 2,171,000
10.625%, due 3/16/25 1,290,000 1,846,248
------------
13,638,373
------------
RUSSIA (3.4%)
Russian Federation
7.50%, due 3/31/30 (a) 27,923 31,464
Series Reg S
7.50%, due 3/31/30 2,711,126 3,053,813
Series Reg S
11.00%, due 7/24/18 3,010,000 4,263,966
------------
7,349,243
------------
TURKEY (6.7%)
Republic of Turkey
6.875%, due 3/17/36 2,200,000 2,180,860
7.00%, due 6/5/20 300,000 312,540
7.25%, due 3/15/15 1,510,000 1,598,788
V 7.375%, due 2/5/25 4,725,000 5,014,643
9.00%, due 6/30/11 1,000,000 1,110,000
11.00%, due 1/14/13 550,000 673,750
11.75%, due 6/15/10 700,000 808,500
12.375%, due 6/15/09 1,470,000 1,639,050
14.00%, due 1/19/11 TRY 1,680,000 1,444,960
------------
14,783,091
------------
UKRAINE (1.1%)
Ukraine Government
6.58%, due 11/21/16 (a) $ 1,000,000 1,016,250
6.875%, due 3/4/11 (a) 350,000 360,955
7.65%, due 6/11/13 (a) 900,000 967,500
------------
2,344,705
------------
URUGUAY (3.7%)
Republic of Uruguay
V 7.875%, due 1/15/33 (e) 5,299,062 6,014,435
8.00%, due 11/18/22 1,741,201 1,984,969
9.25%, due 5/17/17 130,000 157,300
------------
8,156,704
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
VENEZUELA (7.9%)
Republic of Venezuela
6.00%, due 12/9/20 $ 4,500,000 $ 3,789,000
Series Reg S
6.18%, due 4/20/11 (c) 1,750,000 1,662,500
Series Reg S
7.00%, due 12/1/18 1,000,000 915,000
8.50%, due 10/8/14 4,670,000 4,798,425
V 9.25%, due 9/15/27 4,600,000 5,041,600
10.75%, due 9/19/13 680,000 760,580
13.625%, due 8/15/18 200,000 271,000
------------
17,238,105
------------
VIETNAM (0.2%)
Republic of Vietnam
6.875%, due 1/15/16 (a) 400,000 426,000
------------
Total Governments & Federal Agencies
(Cost $139,600,352) 157,948,778
------------
YANKEE BOND (0.4%) (f)
- ----------------------------------------------------------------------------------
ARGENTINA (0.4%)
YPF Sociedad Anonima
9.125%, due 2/24/09 880,000 913,440
------------
Total Yankee Bond
(Cost $868,195) 913,440
------------
Total Long-Term Bonds
(Cost $189,936,280) 208,678,929
------------
<Caption>
NUMBER OF
CONTRACTS
PURCHASED CALL OPTION (0.0%) ++
- ----------------------------------------------------------------------------------
Australian Dollar
Strike Price $0.93
Expire 4/28/08 1,000 28,000
------------
Total Purchased Call Option (Cost $21,650) 28,000
------------
PURCHASED PUT OPTION (0.0%)++
- ----------------------------------------------------------------------------------
British Pound
Strike Price $2.01
Expire 3/27/08 1,000 8,000
------------
Total Purchased Put Option (Cost $20,225) 8,000
------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
14 MainStay Global High Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (5.0%)
- ----------------------------------------------------------------------------------
COMMERCIAL PAPER (1.6%)
Deutsche Bank Financial LLC
4.77%, due 11/1/07 $ 1,580,000 $ 1,580,000
Toyota Motor Credit Corp.
4.73%, due 11/5/07 2,000,000 1,998,949
------------
Total Commercial Paper
(Cost $3,578,949) 3,578,949
------------
<Caption>
SHARES
INVESTMENT COMPANY (3.4%)
State Street Navigator Securities Lending Prime
Portfolio (g) 7,477,018 7,477,018
------------
Total Investment Company
(Cost $7,477,018) 7,477,018
------------
Total Short-Term Investments
(Cost $11,055,967) 11,055,967
------------
Total Investments
(Cost $201,034,122) 100.3% 219,770,896(h)
Liabilities in Excess of
Cash and Other Assets (0.3) (693,611)
--------------- ------------
Net Assets 100.0% $219,077,285
=============== ============
</Table>
<Table>
++ Less than one-tenth of a percent.
+++ All of the Fund's assets are maintained to cover "senior securities
transactions" which may include, but are not limited to, forwards, TBA's,
options and futures. These securities are marked-to-market daily and
reviewed against the value of the Fund's "senior securities" holdings to
ensure proper coverage for these transactions.
(a) May be sold to institutional investors only under Rule 144a or securities
offered pursuant to Section 4(2) of the Securities Act of 1933, as amended.
(b) Represents a security, or a portion thereof, which is out on loan. The
aggregate market value of such securities is $7,309,489; cash collateral of
$7,477,018 (included in liabilities) was received with which the Fund
purchased highly liquid short-term investments.
(c) Floating rate. Rate shown is the rate in effect at October 31, 2007.
(d) Fair valued security. The total market value of the security at October 31,
2007 is $1,569,440, which reflects 0.7% of the Fund's net assets.
(e) CIK ("Cash in Kind")--Interest payment is made with cash or additional
securities.
(f) Yankee Bond--dollar-denominated bond issued in the United States by a
foreign bank or corporation.
(g) Represents a security, or a portion thereof, purchased with cash collateral
received for securities on loan.
(h) At October 31, 2007, cost is $201,087,539 for federal income tax purposes
and net unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $19,788,641
Gross unrealized depreciation (1,105,284)
-----------
Net unrealized appreciation $18,683,357
===========
</Table>
The following abbreviations are used in the above portfolio:
BRL--Brazilian Real
CP--Colombian Peso
EGP--Egyptian Pound
ISK--Icelandic Krona
MXN--Mexican Peso
TRY--New Turkish Lira
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 15
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2007
<Table>
ASSETS:
Investment in securities, at value (identified
cost $201,034,122) including $7,309,489
market value of securities loaned $219,770,896
Cash 563,769
Cash denominated in foreign currencies
(identified cost $58,344) 57,357
Receivables:
Interest 3,830,303
Investment securities sold 3,188,888
Fund shares sold 528,191
Other assets 28,419
Unrealized appreciation on foreign currency
forward contracts 198,406
-------------
Total assets 228,166,229
-------------
LIABILITIES:
Securities lending collateral 7,477,018
Payables:
Investment securities purchased 558,482
Fund shares redeemed 322,129
Manager (See Note 3) 132,931
NYLIFE Distributors (See Note 3) 104,782
Transfer agent (See Note 3) 92,135
Shareholder communication 60,975
Professional fees 18,873
Custodian 15,129
Trustees 2,928
Accrued expenses 2,915
Dividend payable 297,305
Unrealized depreciation on foreign currency
forward contracts 3,342
-------------
Total liabilities 9,088,944
-------------
Net assets $219,077,285
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding
(par value of $.01 per share) unlimited
number of shares authorized $ 186,174
Additional paid-in capital 195,945,753
-------------
196,131,927
Accumulated distributions in excess of net
investment income (279,342)
Accumulated net realized gain on investments
and foreign currency transactions 4,293,715
Net unrealized appreciation on investments 18,736,774
Net unrealized appreciation on translation of
other assets and liabilities in foreign
currencies and foreign currency forward
contracts 194,211
-------------
Net assets $219,077,285
=============
CLASS A
Net assets applicable to outstanding shares $135,321,286
=============
Shares of beneficial interest outstanding 11,459,536
=============
Net asset value per share outstanding $ 11.81
Maximum sales charge (4.50% of offering price) 0.56
-------------
Maximum offering price per share outstanding $ 12.37
=============
CLASS B
Net assets applicable to outstanding shares $ 37,913,222
=============
Shares of beneficial interest outstanding 3,240,638
=============
Net asset value and offering price per share
outstanding $ 11.70
=============
CLASS C
Net assets applicable to outstanding shares $ 45,785,760
=============
Shares of beneficial interest outstanding 3,912,380
=============
Net asset value and offering price per share
outstanding $ 11.70
=============
CLASS I
Net assets applicable to outstanding shares $ 57,017
=============
Shares of beneficial interest outstanding 4,827
=============
Net asset value and offering price per share
outstanding $ 11.81
=============
</Table>
16 MainStay Global High Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2007
<Table>
INVESTMENT INCOME:
INCOME:
Interest $15,275,415
Income from securities loaned--net 50,226
------------
Total income 15,325,641
------------
EXPENSES:
Manager (See Note 3) 1,511,137
Transfer agent--Classes A, B and C (See Note
3) 537,867
Distribution--Class B (See Note 3) 309,099
Distribution--Class C (See Note 3) 334,184
Distribution/Service--Class A (See Note 3) 325,249
Service--Class B (See Note 3) 103,033
Service--Class C (See Note 3) 111,395
Professional fees 95,653
Shareholder communication 87,460
Custodian 60,367
Registration 56,356
Recordkeeping 48,254
Trustees 12,632
Miscellaneous 13,125
------------
Total expenses before recoupment 3,605,811
Net recouped fees (See Note 3) 59,496
------------
Net expenses 3,665,307
------------
Net investment income 11,660,334
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain on:
Security transactions 4,282,700
Foreign currency transactions 46,153
------------
Net realized gain on investments and foreign
currency transactions 4,328,853
------------
Net change in unrealized appreciation
(depreciation) on:
Security transactions (407,218)
Translation of other assets and liabilities
in foreign currencies and foreign currency
forward contracts 202,988
------------
Net change in unrealized depreciation on
investments and foreign currency transactions (204,230)
------------
Net realized and unrealized gain on investments
and foreign currency transactions 4,124,623
------------
Net increase in net assets resulting from
operations $15,784,957
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 17
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2007 AND OCTOBER 31, 2006
<Table>
<Caption>
2007 2006
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 11,660,334 $ 10,985,232
Net realized gain on investments
and foreign currency transactions 4,328,853 6,232,389
Net increase from payments from
Manager
for losses attributable to
shareholder trading
arrangements (see Note 3(B) on
page 25.) -- 11,000
Net change in unrealized
appreciation on investments and
foreign currency transactions (204,230) 2,932,470
---------------------------
Net increase in net assets
resulting from operations 15,784,957 20,161,091
---------------------------
Dividends and distributions to shareholders:
From net investment income:
Class A (7,399,296) (8,582,897)
Class B (2,046,521) (3,551,703)
Class C (2,225,143) (2,373,184)
Class I (412) --
---------------------------
(11,671,372) (14,507,784)
---------------------------
From net realized gain on investments:
Class A (2,758,640) --
Class B (970,992) --
Class C (936,486) --
---------------------------
(4,666,118) --
---------------------------
Total dividends and distributions
to shareholders (16,337,490) (14,507,784)
---------------------------
Capital share transactions:
Net proceeds from sale of shares 61,305,555 88,177,791
Net asset value of shares issued
to shareholders in reinvestment
of dividends and distributions 11,471,891 9,374,074
Cost of shares redeemed (57,268,903) (71,644,784)
Net asset value of shares converted (See Note
1):
Class A 3,114,762 16,067,544
Class B (3,114,762) (16,067,544)
---------------------------
Increase in net assets derived
from capital share
transactions 15,508,543 25,907,081
---------------------------
Net increase in net assets 14,956,010 31,560,388
NET ASSETS:
Beginning of year 204,121,275 172,560,887
---------------------------
End of year $219,077,285 $204,121,275
===========================
Accumulated distributions in excess
of net investment income at end of
year $ (279,342) $ (264,790)
===========================
</Table>
18 MainStay Global High Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
www.mainstayfunds.com 19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------------
JANUARY 1, 2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2007 2006 2005 2004 2003
Net asset value at beginning of period $ 11.82 $ 11.44 $ 11.17 $ 10.49 $ 8.89
-------- -------- ------- ----------- ----------------
Net investment income 0.67 (a) 0.69 (a) 0.73 0.76 0.63
Net realized and unrealized gain on
investments 0.24 0.59 (e) 0.49 0.67 1.56
Net realized and unrealized gain (loss) on
foreign currency transactions 0.01 0.01 0.00 (b) 0.00 (b) 0.00 (b)
-------- -------- ------- ----------- ----------------
Total from investment operations 0.92 1.29 1.22 1.43 2.19
-------- -------- ------- ----------- ----------------
Less dividends and distributions:
From net investment income (0.67) (0.91) (0.76) (0.75) (0.59)
From net realized gain on investments (0.26) -- (0.19) -- --
-------- -------- ------- ----------- ----------------
Total dividends and distributions (0.93) (0.91) (0.95) (0.75) (0.59)
-------- -------- ------- ----------- ----------------
Net asset value at end of period $ 11.81 $ 11.82 $ 11.44 $ 11.17 $ 10.49
======== ======== ======= =========== ================
Total investment return (c) 8.11% 11.75%(d)(e) 11.35% 14.26% 25.21%(f)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 5.70% 5.97% 6.63% 7.29% 7.75%+
Net expenses 1.40% 1.40% 1.43% 1.53% 1.63%+
Expenses (before
recoupment/waiver/reimbursement) 1.37% 1.43%(d) 1.46% 1.53% 1.63%+
Portfolio turnover rate 30% 33% 34% 24% 34%
Net assets at end of period (in 000's) $135,321 $121,810 $86,515 $44,434 $34,371
<Caption>
CLASS A
------------
YEAR ENDED
DECEMBER 31,
2002
Net asset value at beginning of period $ 8.72
------------
Net investment income 0.73
Net realized and unrealized gain on
investments 0.19
Net realized and unrealized gain (loss) on
foreign currency transactions (0.01)
------------
Total from investment operations 0.91
------------
Less dividends and distributions:
From net investment income (0.74)
From net realized gain on investments --
------------
Total dividends and distributions (0.74)
------------
Net asset value at end of period $ 8.89
============
Total investment return (c) 11.01%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 8.49%
Net expenses 1.70%
Expenses (before
recoupment/waiver/reimbursement) 1.91%
Portfolio turnover rate 92%
Net assets at end of period (in 000's) $22,754
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------------------------------
JANUARY 1, 2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2007 2006 2005 2004 2003
Net asset value at beginning of period $ 11.72 $ 11.36 $ 11.10 $ 10.44 $ 8.86
------- ------- ------- ----------- ----------------
Net investment income 0.58 (a) 0.60 (a) 0.65 0.69 0.57
Net realized and unrealized gain on
investments 0.23 0.58 (e) 0.48 0.65 1.54
Net realized and unrealized gain (loss) on
foreign currency transactions 0.01 0.01 (0.00)(b) (0.00)(b) 0.00 (b)
------- ------- ------- ----------- ----------------
Total from investment operations 0.82 1.19 1.13 1.34 2.11
------- ------- ------- ----------- ----------------
Less dividends and distributions:
From net investment income (0.58) (0.83) (0.68) (0.68) (0.53)
From net realized gain on investments (0.26) -- (0.19) -- --
------- ------- ------- ----------- ----------------
Total dividends and distributions (0.84) (0.83) (0.87) (0.68) (0.53)
------- ------- ------- ----------- ----------------
Net asset value at end of period $ 11.70 $ 11.72 $ 11.36 $ 11.10 $ 10.44
======= ======= ======= =========== ================
Total investment return (c) 7.28% 10.87%(d)(e) 10.62% 13.36% 24.33%(f)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 4.95% 5.22% 5.88% 6.54% 7.00%+
Net expenses 2.15% 2.15% 2.18% 2.28% 2.38%+
Expenses (before
recoupment/waiver/reimbursement) 2.12% 2.18%(d) 2.21% 2.28% 2.38%+
Portfolio turnover rate 30% 33% 34% 24% 34%
Net assets at end of period (in 000's) $45,786 $39,176 $28,547 $16,455 $11,031
<Caption>
CLASS C
------------
YEAR ENDED
DECEMBER 31,
2002
Net asset value at beginning of period $ 8.68
------------
Net investment income 0.67
Net realized and unrealized gain on
investments 0.20
Net realized and unrealized gain (loss) on
foreign currency transactions (0.01)
------------
Total from investment operations 0.86
------------
Less dividends and distributions:
From net investment income (0.68)
From net realized gain on investments --
------------
Total dividends and distributions (0.68)
------------
Net asset value at end of period $ 8.86
============
Total investment return (c) 10.33%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 7.74%
Net expenses 2.45%
Expenses (before
recoupment/waiver/reimbursement) 2.66%
Portfolio turnover rate 92%
Net assets at end of period (in 000's) $8,060
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ Annualized.
(a) Per share data based on average shares outsharing during the period.
(b) Less than one cent per share.
(c) Total return is calculated exclusive of sales charges. Class I is not subject to sales
charges.
(d) Includes nonrecurring reimbursements from Manager for professional fees costs. The effect
on total return was less than one hundredth of a percent.
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses were less than $0.01 per share
on net realized gains on investments and the effect on total investment return was less
than 0.01%, respectively.
(f) Total return is not annualized.
</Table>
20 MainStay Global High Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
------------------------------------------------------------------------------------------
JANUARY 1, 2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
$ 11.72 $ 11.36 $ 11.10 $ 10.44 $ 8.86 $ 8.68
------- ------- ------- ----------- ---------------- ------------
0.58 (a) 0.60 (a) 0.65 0.69 0.57 0.67
0.23 0.58 (e) 0.48 0.65 1.54 0.20
0.01 0.01 (0.00)(b) (0.00)(b) 0.00 (b) (0.01)
------- ------- ------- ----------- ---------------- ------------
0.82 1.19 1.13 1.34 2.11 0.86
------- ------- ------- ----------- ---------------- ------------
(0.58) (0.83) (0.68) (0.68) (0.53) (0.68)
(0.26) -- (0.19) -- -- --
------- ------- ------- ----------- ---------------- ------------
(0.84) (0.83) (0.87) (0.68) (0.53) (0.68)
------- ------- ------- ----------- ---------------- ------------
$ 11.70 $ 11.72 $ 11.36 $ 11.10 $ 10.44 $ 8.86
======= ======= ======= =========== ================ ============
7.28% 10.87%(d)(e) 10.62% 13.36% 24.33%(f) 10.33%
4.95% 5.22% 5.88% 6.54% 7.00%+ 7.74%
2.15% 2.15% 2.18% 2.28% 2.38%+ 2.45%
2.12% 2.18%(d) 2.21% 2.28% 2.38%+ 2.66%
30% 33% 34% 24% 34% 92%
$37,913 $43,136 $57,500 $31,459 $26,881 $16,708
</Table>
<Table>
<Caption>
CLASS I
-----------------
AUGUST 31, 2007**
THROUGH
OCTOBER 31,
2007
$11.26
-----------------
0.11 (a)
0.52
0.04
-----------------
0.67
-----------------
(0.12)
--
-----------------
(0.12)
-----------------
$11.81
=================
5.95%(f)
6.12%+
1.15%+
0.99%+
30%
$ 57
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises nineteen funds (collectively referred to as the
"Funds"). These financial statements and notes relate only to MainStay Global
High Income Fund (the "Fund").
The Fund currently offers four classes of shares. Class A shares and Class B
shares commenced on June 1, 1998. Class C shares commenced on September 1, 1998.
Class I shares commenced on August 31, 2007. Class A shares are offered at net
asset value per share plus an initial sales charge. No sales charge applies on
investments of $1 million or more (and certain other qualified purchases) in
Class A shares, but a contingent deferred sales charge is imposed on certain
redemptions of such shares within one year of the date of purchase. Class B
shares and Class C shares are offered without an initial sales charge, although
a declining contingent deferred sales charge may be imposed on redemptions made
within up to six years of purchase of Class B shares and a 1% contingent
deferred sales charge may be imposed on redemptions made within one year of
purchase of Class C shares. Class I shares are not subject to a sales charge. As
approved by the Board of Trustees in 1997, Class B shares convert to Class A
shares eight years after the date they were purchased. The four classes of
shares bear the same voting (except for issues that relate solely to one class),
dividend, liquidation and other rights and conditions except that Class B and
Class C shares are subject to higher distribution fee rates than Class A shares
under a distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I
shares are not subject to a distribution or service fee.
The Fund's investment objective is to seek to provide maximum current income by
investing primarily in high yield debt securities of non-U.S. issuers. Capital
appreciation is a secondary objective. The Fund is "non-diversified," which
means that it may invest a greater percentage of its assets than diversified
funds in a particular issuer. This may make it more susceptible than diversified
funds to risks associated with an individual issuer, and to single economic,
political or regulatory occurrences.
The Fund's principal investments include high yield securities (sometimes called
"junk bonds"), which are generally considered speculative because they present a
greater risk of loss, including default, than higher quality debt securities.
These securities pay a premium--a high interest rate or yield--because of the
increased risk of loss. These securities can also be subject to greater price
volatility.
The Fund also invests in foreign securities, which carry certain risks that are
in addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country, industry or region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent or brokers selected by the Fund's Manager, as defined in Note 3,
whose prices reflect broker/dealer supplied valuations and electronic data
processing techniques, if such prices are deemed by the Fund's Manager to be
representative of market values, at the regular close of trading of the New York
Stock Exchange (generally 4:00 p.m. Eastern time) on each day the Fund is open
for business. Investments in mutual funds are valued at their net asset value as
of the close of the New York Stock Exchange on the date of valuation. Foreign
currency forward contracts are valued at their fair market values determined on
the basis of the mean between the last current bid and ask prices based on
dealer or exchange quotations.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: a security the trading for which has been
halted or suspended; a debt security that has recently gone into default and for
which there is not a current market quotation; a security of an issuer that has
entered into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; a security
22 MainStay Global High Income Fund
where the trading on that security's principal market is temporarily closed at a
time when, under normal conditions, it would be open. At October 31, 2007, the
Fund held securities with a value of $1,569,440 that were valued in such a
manner.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. These events may include, but are not limited to, situations
relating to a single issue in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. Should the
Manager or Subadvisor, as defined in Note 3, conclude that such events may have
effected the accuracy of the last price reported on the local foreign market,
the Manager or Subadvisor may, pursuant to procedures adopted by the Fund,
adjust the value of the local price to reflect the impact on the price of such
securities as a result of such events. Additionally, international equity
securities are also fair valued whenever the movement of a particular index
exceeds certain thresholds. In such cases, the securities are fair valued by
applying factors provided by a third party vendor in accordance with the Fund's
policies and procedures.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
of net investment income monthly and distributions of net realized capital and
currency gains, if any, annually. All dividends and distributions are reinvested
in shares of the Fund, at net asset value, unless the shareholder elects
otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America. Permanent
book/tax differences relating to income and gains are reclassified amongst
undistributed net investment income, accumulated net realized gain or loss and
paid-in-capital.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued as earned using the effective interest rate method. Discounts and
premiums on securities purchased, other than short-term securities, for the Fund
are accreted and amortized, respectively, on the effective interest rate method
over the life of the respective securities or, in the case of a callable
security, over the period to the first date of call. Discounts and premiums on
short-term securities are accreted and amortized, respectively, on the straight
line method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (C) on
page 26) are allocated to separate classes of shares pro rata based upon their
relative net assets value on the date the expenses are incurred. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. Premiums are received
and are recorded as liabilities. The liabilities are subsequently adjusted and
unrealized appreciation or depreciation is recorded to reflect the current value
of the options written. Premiums received from writing options which expire are
treated as realized gains. Premiums received from writing options which are
exercised or are canceled in closing purchase transactions are added to the
proceeds or netted against the amount paid on the transaction to determine the
realized gain or loss. By writing a covered call option, in exchange for the
premium, the Fund foregoes the opportunity for capital appreciation above the
exercise price should the price of the underlying security or foreign currency
increase. By writing a covered put option, the Fund, in exchange for the
premium, accepts the risk of a decline in the market value of the underlying
security or foreign currency below the exercise price. A call option may be
covered by the call writer's owning the underlying security throughout the
option period. A call option may also be covered by the call writer's
maintaining liquid assets valued at greater than the exercise price of the call
written. When writing a covered call option, the Fund, in return for the premium
on the option, gives up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as the
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
obligation as the writer continues, has retained the risk of loss should the
price of the underlying security decline. After writing a put option, the Fund
may incur a loss equal to the difference between the exercise price of the
option and the sum of the market value of the underlying security plus the
premium received from the sale of the option.
The Fund may purchase call and put options on its portfolio securities. The Fund
may purchase call options to protect against an increase in the price of the
security it anticipates purchasing. The Fund may purchase put options on its
securities to protect against a decline in the value of the security or to close
out covered written put positions. The Fund may also purchase options to seek to
enhance returns. Risks may arise from an imperfect correlation between the
change in market value of the securities held by the Fund and the prices of
options relating to the securities purchased or sold by the Fund and from the
possible lack of a liquid secondary market for an option. The maximum exposure
to loss for any purchased option is limited to the premium initially paid for
the option.
(H) LOAN ASSIGNMENTS, PARTICIPATIONS AND COMMITMENTS. The Fund may invest in
loan assignments and loan participations. Loan assignments and participations
are agreements to make money available (a "commitment") to a borrower in a
specified amount, at a specified rate and within a specified time. Such loan
assignments and participations are typical senior, secured and collaterized in
nature. The Fund records an investment when the borrower withdraws money and
records interest as earned. These loans pay interest at rates which are
periodically reset by reference to a base lending rate plus a spread. These base
lending rates are generally the prime rate offered by a designed U.S. bank or
London InterBank Offered Rate ("LIBOR").
The loans in which the Fund invests are generally readily marketable, but may be
subject to some restrictions on resale. For example, the Fund may be
contractually obligated to receive approval from the agent bank and/or borrower
prior to the sale of these investments.
The Fund assumes the credit risk of the borrower, the selling participant and
any other persons interpositioned between the Fund and the borrower
("intermediate participants"). In the event that the borrower, selling
participant or intermediate participants becomes insolvent or enters into
bankruptcy, the Fund may incur certain costs and delays in realizing payment, or
may suffer a loss of principal and/or interest.
Unfunded commitments represent the remaining obligation of the Fund to the
borrower. At any point in time, up to the maturity date of the issue, the
borrower may demand the unfunded portion. These unfunded amounts are recorded in
memorandum accounts.
(I) FOREIGN CURRENCY FORWARD CONTRACTS. A foreign currency forward contract is
an agreement to buy or sell currencies of different countries on a specified
future date at a specified rate. During the period the forward contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" such contract on a daily basis to reflect the
market value of the contract at the end of each day's trading. When the forward
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Fund's basis in the contract. The Fund enters into foreign currency forward
contracts primarily to hedge its foreign currency denominated investments and
receivables and payables against adverse movements in future foreign exchange
rates or to try to enhance the Fund's returns.
The use of foreign currency forward contracts involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities. The contract amount reflects the extent of the Fund's
involvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. The
unrealized appreciation on forward contracts reflects the Fund's exposure at
period end to credit loss in the event of a counterparty's failure to perform
its obligations. (See Note 5 on page 27.)
(J) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Prices of securities denominated in foreign currency amounts
are translated into U.S. dollars at the mean between the buying and selling
rates last quoted by any major U.S. bank at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date,
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities are presented at the exchange rates and market values
at the close of the period. The realized and unrealized changes in net assets
arising from fluctuations in exchange rates and market prices of securities are
not separately presented.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains or losses
realized as a result of differences between the amounts of securities sale
proceeds or purchase cost, dividends, interest and withholding taxes as recorded
on the Fund's books, and the U.S. dollar equivalent amount actually received or
paid. Net currency gains or losses from valuing such foreign currency
denominated assets and liabilities, other than investments at valuation date
exchange rates, are reflected in unrealized foreign exchange gains or losses.
24 MainStay Global High Income Fund
(K) SECURITIES LENDING. In order to realize additional income the Fund may lend
its securities to broker-dealers and financial institutions. The loans are
collateralized by cash or securities at least equal at all times to the market
value of the securities loaned. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. The Fund may bear
the risk of delay in recovery of, or loss of rights in, the securities loaned
should the borrower of the securities experience financial difficulty. The Fund
receives compensation for lending its securities in the form of fees or it
retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(L) INDEMNIFICATIONS. In the normal course of business, the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote.
However, there can be no assurance that material liabilities related to such
obligations will not arise in the future which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager") a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. NYLIM provides offices and conducts clerical, recordkeeping and
bookkeeping services, and is responsible for the financial and accounting
records required to be maintained by the Fund. NYLIM also pays the salaries and
expenses of all personnel affiliated with the Fund and all the operational
expenses that are not the responsibility of the Fund. MacKay Shields LLC (the
"Subadvisor"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life, serves as subadvisor to the Fund and is responsible
for the day-to-day portfolio management of the Fund. Pursuant to the terms of a
Subadvisory Agreement between NYLIM and the Subadvisor, NYLIM pays for the
services of the Subadvisor.
The Fund is contractually obligated to pay NYLIM a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.70% on assets up to $500 million and 0.65% on assets in
excess of $500 million.
Effective March 1, 2007, NYLIM has entered into a written expense limitation
agreement under which it has agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses (total annual operating expenses
excluding taxes, interest, litigation, extraordinary expenses, and brokerage and
other transaction expenses relating to the purchase or sale of portfolio
investments) do not exceed the following amounts of average daily net assets for
each class: Class A, 1.40%; Class B, 2.15%; Class C, 2.15%; and Class I, 1.15%.
This expense limitation may be modified or terminated only with the approval of
the Board of Trustees. NYLIM may recoup the amount of any management fee waivers
or expense reimbursements from the Fund pursuant to the agreement if such action
does not cause the Fund to exceed existing expense limitations and the
recoupment is made within three years after the year in which NYLIM incurred the
expense.
For the year ended October 31, 2007, NYLIM earned fees from the Fund in the
amount of $1,511,137 and recouped $59,496.
As of October 31, 2007, the amounts of waived fees that are subject to possible
recoupment by NYLIM, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2009 TOTAL
$12,913 $12,913
-------------------------------------------
</Table>
Prior to March 1, 2007, NYLIM had an agreement in place under which it had
agreed to waive a portion of the Fund's management fee or reimburse the expenses
of the Fund so that the Fund's total ordinary operating expenses did not exceed
1.40% of the Fund's average daily net assets for its Class A shares. NYLIM also
applied an equivalent waiver or reimbursement, in an equal amount of basis
points, to the other share classes of the Fund.
State Street Bank & Trust Company ("SSBT"), One Lincoln Street, Boston,
Massachusetts, 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with NYLIM. These services include calculating
daily net asset values of the Fund, maintaining general ledger and sub-ledger
accounts for the calculation of the Fund's respective net asset values, and
assisting NYLIM in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, SSBT is compensated by
NYLIM.
(B) PAYMENTS FROM AFFILIATES. NYLIM reimbursed or paid all expenses relating to
the Board of Trustees' review of certain shareholder trading matters as
described below
www.mainstayfunds.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
in the footnote relating to "Other Matters." (See Note 10 on page 28.)
The total costs associated with the Board of Trustees' review were approximately
$849,975 and included payments to certain third party service providers.
The amount that was reimbursed to the Fund was $23,939. Additional payments were
made by affiliates relating to the shareholder trading matters. Further
discussion regarding these payments by affiliates can be found below in the
footnote relating to "Other Matters."
(C) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, other than Class I shares, has adopted distribution plans
(the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940
Act.
Pursuant to the Class A Plan, the Distributor receives a monthly distribution
fee from the Fund at an annual rate of 0.25% of the average daily net assets of
the Fund's Class A shares, which is an expense of the Class A shares of the Fund
for distribution or service activities as designated by the Distributor.
Pursuant to the Class B and Class C Plans, the Fund pays the Distributor a
monthly distribution fee, which is an expense of the Class B and Class C shares
of the Fund, at the annual rate of 0.75% of the average daily net assets of the
Fund's Class B and Class C shares. The Plans provide that the Class B and Class
C shares of the Fund also incur a service fee at the annual rate of 0.25% of the
average daily net asset value of the Class B and Class C shares of the Fund.
Class I shares are not subject to a distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(D) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $56,134 the year ended
October 31, 2007. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $721, $81,741 and $17,757, respectively, for the year ended October
31, 2007.
(E) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund, for the year ended October 31, 2007,
amounted to $537,867.
(F) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts, effective March 1, 2007. Shareholders with an account
balance of less than $1,000 are charged an annual per account fee of $20
(assessed semi-annually).
(G) CAPITAL. At October 31, 2007, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $7,044,179 5.2%
- ------------------------------------------------------------
Class C 337 0.0*
- ------------------------------------------------------------
Class I 26,359 46.2
- ------------------------------------------------------------
</Table>
* Less than one-tenth of a percent.
(H) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2007, these fees, which are included in professional fees
shown on the Statement of Operations, were $8,154.
The Fund pays the Manager a monthly fee for certain pricing and recordkeeping
services provided under the Accounting Agreement at the annual rate of 1/20 of
1% for the first $20 million of average monthly net assets, 1/30 of 1% of the
next $80 million of average monthly net assets and 1/100 of 1% of any amount in
excess of $100 million of average monthly net assets. Fees for these services
provided to the Fund by the Manager amounted to $48,254 for the year ended
October 31, 2007.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2007, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL GAINS TEMPORARY APPRECIATION ACCUMULATED
INCOME (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$17,963.. $4,347,132 $(297,305) $18,877,568 $22,945,358
---------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized appreciation is
primarily due to wash sale deferrals.
The other temporary differences are primarily due to dividends payable.
26 MainStay Global High Income Fund
The following table discloses the current year reclassifications between
accumulated distributions in excess of net investment income and accumulated net
realized gain on investments, arising from permanent differences; net assets at
October 31, 2007 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT GAIN (LOSS) ADDITIONAL
INCOME (LOSS) ON INVESTMENTS PAID-IN CAPITAL
$ (3,514).. $ 3,514 $--
-------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to foreign currency gain
(loss), paydown gain (loss), reclassification of distributions and foreign
currency transactions.
The tax character of distributions paid during the years ended October 31, 2007
and October 31, 2006, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2007 2006
Distributions paid from:
Ordinary income $11,669,574 $14,507,784
Long-term capital gains 4,667,916 --
- ---------------------------------------------------------------
$16,337,490 $14,507,784
- ---------------------------------------------------------------
</Table>
NOTE 5--FOREIGN CURRENCY FORWARD CONTRACTS AND FOREIGN CURRENCY TRANSACTIONS:
Foreign currency forward contracts open at October 31, 2007:
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
FOREIGN CURRENCY BUY CONTRACTS PURCHASED SOLD (DEPRECIATION)
Philippines Peso vs. U.S. Dollar, expiring 11/5/07 PP 45,760,000 $1,047,619 $ 47,619
- ------------------------------------------------------------------------------------------------------------------------
Philippines Peso vs. U.S. Dollar, expiring 2/5/08 PP 45,760,000 1,043,558 (3,342)
- ------------------------------------------------------------------------------------------------------------------------
Turkish Lira vs. U.S. Dollar expiring 11/5/07 TRY 1,319,500 1,130,104 130,104
- ------------------------------------------------------------------------------------------------------------------------
Turkish Lira vs. U.S. Dollar expiring 2/5/08 TRY 1,319,500 1,098,266 20,683
- ------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation on foreign currency forward
contracts $ 195,064
- ------------------------------------------------------------------------------------------------------------------------
</Table>
Foreign Currency held at October 31, 2007:
<Table>
<Caption>
CURRENCY COST VALUE
Argentinian Peso ARS 178,821 $57,929 $56,927
Egyptian Pound EGP 2,377 415 430
- -----------------------------------------------------------------------------
$58,344 $57,357
- -----------------------------------------------------------------------------
</Table>
NOTE 6--CUSTODIAN:
SSBT is the custodian of cash and securities of the Fund. Custodial fees are
charged to the Fund based on the market value of securities in the Fund and the
number of certain cash transactions incurred by the Fund.
NOTE 7--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. These funds pay a commitment fee, at an annual rate of .060% of the
average commitment amount, regardless of usage, to The Bank of New York, which
acts as agent to the syndicate. Such commitment fees are allocated among the
funds based upon net assets and other factors. Interest on any revolving credit
loan is charged based upon the Federal Funds Advances rate. There were no
borrowings made or outstanding on the line of credit during the year ended
October 31, 2007.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2007 Purchase and sales of U.S. Government
securities were $1,390 and $1,400, respectively. Purchases and sales of
securities, other than U.S. Government securities and short-term securities,
were $70,198 and $59,795, respectively.
www.mainstayfunds.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 3,313 $ 38,936
Shares issued to shareholders in
reinvestment of dividends and
distributions 611 7,156
Shares redeemed (3,035) (35,495)
---------------------
Net increase in shares outstanding
before conversion 889 10,597
Shares converted from Class B (See Note
1) 266 3,115
---------------------
Net increase 1,155 $ 13,712
=====================
Year ended October 31, 2006:
Shares sold 4,891 $ 56,606
Shares issued to shareholders in
reinvestment of dividends 467 5,380
Shares redeemed (4,020) (46,152)
---------------------
Net increase in shares outstanding
before conversion 1,338 15,834
Shares converted from Class B (See Note
1) 1,406 16,068
---------------------
Net increase 2,744 $ 31,902
=====================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 468 $ 5,463
Shares issued to shareholders in
reinvestment of dividends and
distributions 204 2,378
Shares redeemed (843) (9,783)
---------------------
Net decrease in shares outstanding
before conversion (171) (1,942)
Shares reacquired upon conversion into
Class A (See Note 1) (268) (3,115)
---------------------
Net decrease (439) $ (5,057)
=====================
Year ended October 31, 2006:
Shares sold 962 $ 11,053
Shares issued to shareholders in
reinvestment of dividends 220 2,512
Shares redeemed (1,148) (13,156)
---------------------
Net increase (decrease) in shares
outstanding before conversion 34 409
Shares reacquired upon conversion into
Class A (See Note 1) (1,417) (16,068)
---------------------
Net decrease (1,383) $(15,659)
=====================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 1,441 $ 16,851
Shares issued to shareholders in
reinvestment of dividends and
distributions 167 1,938
Shares redeemed (1,038) (11,990)
---------------------
Net increase 570 $ 6,799
=====================
Year ended October 31, 2006:
Shares sold 1,788 $ 20,519
Shares issued to shareholders in
reinvestment of dividends 130 1,482
Shares redeemed (1,089) (12,337)
---------------------
Net increase 829 $ 9,664
=====================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2007:*
Shares sold 5 $ 55
Shares issued to shareholders in
reinvestment of dividends and
distributions --(a) --(a)
-------------------
Net increase 5 $ 55
===================
</Table>
(a) Less than one thousand.
* The Class I Shares commenced operations on August 31, 2007.
NOTE 10--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission ("SEC") and the New York State
Attorney General, and, as noted in the notes to the year-end 2004, 2005 and 2006
financial statements of each fund of the Trust, NYLIM was previously a party to
arrangements with certain registered representatives of broker-dealers relating
to the level of trading by clients of those registered representatives in shares
of certain funds of the Trust. All such arrangements were terminated by the
fourth quarter of 2003.
NYLIM and the Trustees of the Trust undertook a review of the possible dilutive
effects that transactions under those arrangements and certain other levels of
trading by Fund shareholders over the period from 1999 to 2003 may have had on
the funds. As a result of this review, in December 2005, NYLIM made payments
totaling $5.882 million to nine MainStay funds. The amount paid to the MainStay
Global High Income Fund was $11,000. NYLIM has reimbursed or paid all expenses
relating to the Board of Trustees' review of this matter.
In a separate matter, in 2004 the SEC raised concerns relating to a guarantee
provided to shareholders of the MainStay Equity Index Fund and the fees and
expenses of that Fund as well as the related guarantee disclosure to
28 MainStay Global High Income Fund
that fund's shareholders. Discussions have been held with the SEC concerning a
possible resolution of this matter. There can be no assurance of the outcome of
these efforts.
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS:
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation becomes effective for the Fund's 2008 fiscal
year, and is to be applied to all open tax years as of the date of
effectiveness. Based on Management's analysis, the determination has been made
that the adoption of the interpretation on November 1, 2007, did not have an
impact on the Fund's financial statements upon adoption. Management continually
reviews the Fund's tax positions and such conclusions under the Interpretation
based on factors, including, but not limited to, ongoing analyses of tax laws,
regulations and interpretations, thereof.
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The changes to current generally accepted accounting
principles from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures
about fair value measurements. As of October 31, 2007, the Fund does not believe
the adoption of SFAS No. 157 will impact the amounts reported in the Fund's
financial statements. However, additional disclosures may be required about the
inputs used to develop the measurements and the effect of certain measurements
reported in the financial statements for a fiscal period.
www.mainstayfunds.com 29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Global High Income Fund ("the
Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2007, and the related statement of operations for the year or period then ended,
the statements of changes in net assets for each of the years or periods in the
two-year period then ended, and the financial highlights for each of the years
or periods in the four-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for the
periods presented through October 31, 2003, were audited by other auditors,
whose report dated December 18, 2003, expressed an unqualified opinion thereon.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2007, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Global High Income Fund of The MainStay Funds as of October 31, 2007,
the results of its operations for the year or period then ended, the changes in
its net assets for each of the years or periods in the two-year period then
ended, and the financial highlights for each of the years or periods in the
four-year period then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 20, 2007
30 MainStay Global High Income Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with New York Life Investment Management LLC (the "Manager") and the
Subadvisory Agreement between the Manager and MacKay Shields LLC, a wholly-owned
indirect subsidiary of New York Life Investment Management Holdings LLC, an
affiliate of the Manager, (the "Subadvisor"), (each an "Agreement") at a meeting
held on May 22 and 23, 2007. In connection with the approval of each Agreement,
the Trustees reviewed a significant amount of a wide variety of information that
they had requested and received from the Manager and the Subadvisor, and data
and analysis from an outside data provider and a third party consultant. The
Trustees considered various industry trends and regulatory developments in their
deliberations. In considering approval of each Agreement, and in evaluating the
fairness of the compensation to be paid by the Fund, the Trustees met both as a
full Board and in executive session with no Interested Trustee present, in
advance of the meeting at which the Agreements were approved, and they
considered a number of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and the Subadvisor have provided historically to the Fund, and
also generally to other series of the Trust. Among other services, the Manager's
services have included investment management services, including monitoring and
evaluating the Subadvisor's investment program and investment results with
respect to the Fund, and the Subadvisor's compliance with the Fund's investment
policies and restrictions, and administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets,
and its other services include, among other services, providing reports to the
Manager and reviewing certain aspects of Fund filings. The Trustees considered,
among other things, the Manager's and Subadvisor's management, personnel,
resources, operations and portfolio management capabilities. The Board reviewed
reports on the Subadvisor's brokerage practices, including with respect to best
execution of portfolio trades. The Trustees considered the Manager's supervision
of the Fund's service providers and its attention to the compliance program of
the Trust, the Manager, the Subadvisor and certain other service providers, as
well as the Subadvisor's attention to its compliance program. The Trustees noted
the generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's mid-range investment
performance relative to peer funds over various time periods considered.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information that indicated that the profitability to the Manager and its
affiliates from the Management Agreement with respect to the Fund was moderate
to low, and from the overall relationship with the Trust, was low. The Trustees
considered other benefits that the Manager and its affiliates receive from the
relationship with the Trust, including benefits that NYLIFE Distributors and
MainStay Shareholder Services receive in exchange for services they provide to
the Funds, and certain benefits from soft dollar arrangements. The Trustees
acknowledged certain benefits to the reputation of the Manager and the Trust
from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They considered that, across the Trust
(though not every series or share class), gross transfer agency fees tended to
be relatively high and, therefore, adversely affected gross expense ratios.
Noting that the Trust historically permitted smaller investor accounts, the
Trustees considered measures that had been recently implemented that were
intended to increase the average size of shareholder accounts, including
generally higher investment minimums, and small account fees, and the Trustees
considered potential benefits to the Manager and its affiliates arising from
such measures.
www.mainstayfunds.com 31
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the Manager's willingness to implement a
contractual breakpoint that would reduce the Fund's management fee at asset
levels above the breakpoint, and the fact that the breakpoint was intended to
provide that shareholders would share in benefits from economies of scale
obtained through the growth in the Fund's assets. The Trustees noted that the
Fund not reached the asset level at which the breakpoint would reduce the Fund's
management fee rate. The Trustees reviewed information about the potential
effect of asset growth on Fund expenses, the difficulty of forecasting its
effect on the profitability of the Manager and its affiliates, and the
management fee breakpoints applicable to the Fund and certain other funds. It
was noted that, to the extent the Fund's gross expenses currently were higher
than its net expenses, the reduction of the Fund's gross expenses through the
achievement of economies of scale might benefit the Manager by reducing the
expenses the Manager must reimburse to the Fund rather than directly benefiting
the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by the
Fund, the Trustees evaluated factors such as the fees and expenses borne by
other registered funds in the market pursuing strategies generally similar to
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager and Subadvisor, including separate institutional
accounts having investment strategies similar to that of the Fund, and took
account of explanations and other information relating to the fees and expenses
of those other funds and accounts. The Trustees considered the current and
proposed contractual and net management fees, its anticipated gross and net
expense ratio, and various components of the expense ratio, in comparison to
other funds in comparison groupings. The Trustees generally acknowledged the
historical relationships among the Manager, the Subadvisor and the Trust and the
likely difficulties in implementing an alternative to the investment management
arrangement between the Trust and the Manager. The Trustees took account of the
Manager's willingness to maintain the management fee waiver and expense
limitation applicable to the Fund.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings, with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. This summary set out
above describes the most important, but not all, of the factors considered by
the Trustees in considering each Agreement. On the basis of their review, a
majority of the Trustees and a majority of the Non-Interested Trustees concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the judgment of a
majority of the Trustees and a majority of the Non-Interested Trustees that
approval of each Agreement was in the best interests of the Fund and its
shareholders.
32 MainStay Global High Income Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advise shareholders within
60 days of the Fund's fiscal year end (October 31, 2007) as to the federal tax
status of dividends paid by the Fund during such fiscal year. Accordingly, the
Fund paid long-term capital gain distributions of $4,667,916.
The dividends paid by the Fund during the fiscal year ended October 31, 2007,
should be multiplied by 1.0% to arrive at the amount eligible for qualified
interest income.
In January 2008, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2007. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2007.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
or (iii) on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 1-800-MAINSTAY (1-800-624-6782). You also can obtain and review copies
of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC
(information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330).
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of The MainStay Funds (the
"Trust") was held on May 4, 2007, at the offices of New York Life Investment
Management LLC in Parsippany, New Jersey. The purpose of the meeting was to
elect the following individuals to the Board of Trustees of the Trust:
- Susan B. Kerley
- Alan R. Latshaw
- Peter Meenan
- Richard H. Nolan, Jr.
- Richard S. Trutanic
- Roman L. Weil
- John A. Weisser
- Brian A. Murdock (Interested Trustee)
There are no other Trustees of the Trust.
No other business came before the special meeting. The proposal to elect
Trustees was passed by the shareholders of the Fund as shown below:
<Table>
<Caption>
GLOBAL HIGH VOTES VOTES
INCOME FUND FOR WITHHELD ABSTENTIONS TOTAL
Susan B.
Kerley 13,359,684.115 20,393.306 47,109.000 13,427,186.421
- ---------------------------------------------------------------------------
Alan R.
Latshaw 13,360,851.720 19,225.701 47,109.000 13,427,186.421
- ---------------------------------------------------------------------------
Peter Meenan 13,359,333.845 20,743.576 47,109.000 13,427,186.421
- ---------------------------------------------------------------------------
Richard H.
Nolan, Jr. 13,361,186.491 18,890.930 47,109.000 13,427,186.421
- ---------------------------------------------------------------------------
Richard S.
Trutanic 13,361,350.331 18,727.090 47,109.000 13,427,186.421
- ---------------------------------------------------------------------------
Roman L. Weil 13,359,388.638 20,688.783 47,109.000 13,427,186.421
- ---------------------------------------------------------------------------
John A.
Weisser 13,359,604.687 20,472.734 47,109.000 13,427,186.421
- ---------------------------------------------------------------------------
Brian A.
Murdock 13,361,350.331 18,727.090 47,109.000 13,427,186.421
- ---------------------------------------------------------------------------
</Table>
This resulted in approval of the proposal.
www.mainstayfunds.com 33
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Pursuant to
notice, a Special Meeting of Shareholders of the Trust was held on May 4, 2007,
at NYLIM's offices in Parsippany, New Jersey. The Trustees listed below were
elected to serve the Trust effective June 7, 2007.
Each Trustee serves until his or her successor is elected and qualified or until
his or her resignation, death or removal. The Retirement Policy provides that a
Trustee shall tender his or her resignation upon reaching age 72. A Trustee
reaching the age of 72 may continue for additional one-year periods with the
approval of the Board's Nominating and Governance Committee, except that no
Trustee shall serve on the Board past his or her 75th birthday. Officers serve a
term of one year and are elected annually by the Trustees. The business address
of each Trustee and officer listed below is 51 Madison Avenue, New York, New
York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF FUNDS
POSITION(S) HELD IN FUND COMPLEX
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
BRIAN A. MURDOCK Indefinite; Member of the Board of Managers 73 Trustee, Eclipse Funds since
3/14/56 Trustee and Chief and President (since 2004) and June, 2007 (3 funds); Director,
Executive Officer Chief Executive Officer (since Eclipse Funds Inc. since June
since 2006 2006), New York Life Investment 2007 (22 funds); Director,
Management LLC and New York MainStay VP Series Fund, Inc.,
Life Investment Management since 2006 (24 portfolios);
Holdings LLC; Senior Vice Director, ICAP Funds, Inc.,
President, New York Life since 2006 (3 funds)
Insurance Company (since 2004);
Chairman of the Board and
President, NYLIFE Distributors
LLC (since 2004); Member of the
Board of Managers, NYLCAP
Manager LLC and Madison Capital
Funding LLC (since 2004),
MacKay Shields LLC and
Institutional Capital LLC
(since 2006), and McMorgan &
Company LLC (since 2007); Chief
Executive Officer, Eclipse
Funds and Eclipse Funds Inc.
(since 2006); Chairman (2006 to
2007) and Director and Chief
Executive Officer (since 2006),
MainStay VP Series Fund, Inc.;
Director and Chief Executive
Officer, ICAP Funds, Inc.
(since 2006); Chief Investment
Officer, MLIM Europe and Asia
(2001 to 2003); President of
Merrill Japan and Chairman of
MLIM's Pacific Region (1999 to
2001)
-----------------------------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow Capital
Management, Inc., McMorgan & Company LLC, NYLIFE Securities Inc. and/or NYLIFE
Distributors LLC, as described in detail above in the column "Principal
Occupation(s) During Past Five Years."
34 MainStay Global High Income Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. KERLEY Indefinite; Partner, Strategic Management 73 Chairman since 2005 and Trustee
8/12/51 Chairman and Advisors LLC (since 1990) since 2000, Eclipse Funds (3
Trustee since funds); Chairman since 2005 and
June 2007 Director since 1990, Eclipse
Funds Inc. (22 funds); Chairman
and Director, ICAP Funds, Inc.,
since 2006 (3 funds); Chairman
and Director, MainStay VP
Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
Legg Mason Partners Funds,
Inc., since 1991 (30
portfolios)
----------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & Young 73 Trustee, Eclipse Funds since
3/27/51 Trustee and Audit LLP (2002 to 2003); Partner, June 2007 (3 funds); Director,
Committee Arthur Andersen LLP (1989 to Eclipse Funds Inc. since June
Financial Expert 2002); Consultant to the Audit 2007 (22 funds); Director, ICAP
since 2006 and Compliance Committee of The Funds, Inc., since June 2007 (3
MainStay Funds (2004 funds); Director, MainStay VP
to 2006) Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
State Farm Associates Funds
Trusts since 2005 (3
portfolios); Trustee, State
Farm Mutual Fund Trust since
2005 (15 portfolios); Trustee,
State Farm Variable Product
Trust since 2005 (9 portfolios)
----------------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds since
12/5/41 Trustee since President and Chief Executive 2002 (3 funds); Director,
June 2007 Officer, Babson-United, Inc. Eclipse Funds Inc. since 2002
(financial services firm) (2000 (22 funds); Director, ICAP
to 2004); Independent Funds, Inc.,
Consultant (1999 to 2000); Head since 2006 (3 funds); Director,
of Global Funds, Citicorp (1995 MainStay VP Series Fund, Inc.,
to 1999) since June 2007 (24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 73 Trustee, Eclipse Funds since
NOLAN, JR. Trustee since Management; President--Shields/ June 2007 (3 funds); Director,
11/16/46 June 2007 Alliance, Alliance Capital Eclipse Funds Inc. since June
Management (1994 to 2004) 2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 2006
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman (since 1990) and Chief 73 Trustee, Eclipse Funds since
TRUTANIC Trustee since Executive Officer (1990 to June 2007 (3 funds); Director,
2/13/52 1994 1999), Somerset Group Eclipse Funds Inc. since June
(financial advisory firm); 2007 (22 funds); Director, ICAP
Managing Director and Advisor, Funds, Inc., since June 2007 (3
The Carlyle Group (private funds); Director, MainStay VP
investment firm) (2002 to Series Fund, Inc., since June
2004); Senior Managing Director 2007 (24 portfolios)
and Partner, Groupe Arnault
S.A. (private investment firm)
(1999
to 2002)
----------------------------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 35
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEE
ROMAN L. WEIL Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds since
5/22/40 Trustee and Audit Accounting, Graduate School of June 2007 (3 funds); Director,
Committee Business, University of Eclipse Funds Inc. since June
Financial Expert Chicago; President, Roman L. 2007 (22 funds); Director, ICAP
since June 2007 Weil Associates, Inc. Funds, Inc., since June 2007 (3
(consulting firm) funds); Director, MainStay VP
Series Fund, Inc., since 1994
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 73 Trustee, Eclipse Funds since
10/22/41 Trustee since Salomon Brothers, Inc. (1971 to June 2007 (3 funds); Director,
June 2007 1995) Eclipse Funds Inc. since June
2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 1997
(24 portfolios); Trustee,
Direxion Funds (69 funds) and
Direxion Insurance Trust (45
funds) since March 2007
----------------------------------------------------------------------------------------------------------------------
</Table>
Terry L. Lierman resigned as Trustee of the Trust effective May 31, 2007. Edward
J. Hogan, John B. McGuckian and Donald E. Nickelson resigned as Trustees of the
Trust effective June 7, 2007.
At a meeting of the Board of Trustees held on June 7 and 8, 2007, the following
individuals were appointed to serve as Officers of the Trust effective June 7,
2007:
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ROBERT A. Chief Legal Senior Managing Director, General Counsel and Secretary, New
ANSELMI Officer since York Life Investment Management LLC (including predecessor
10/19/46 2004 advisory organizations) (since 2000); Secretary (since 2001)
and General Counsel (since 2004), New York Life Investment
Management Holdings LLC; Senior Vice President, New York
Life Insurance Company (since 2000); Vice President and
Secretary, McMorgan & Company LLC (since 2001); Secretary,
NYLIM Service Company LLC (since 2005), NYLCAP Manager LLC
(since 2004), Madison Capital Funding LLC (since 2002), and
Institutional Capital LLC (since 2006); Chief Legal Officer,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), McMorgan Funds (since 2005) and
ICAP Funds, Inc. (since 2006); Managing Director and Senior
Counsel, Lehman Brothers Inc. (1998 to 1999); General
Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998)
-------------------------------------------------------------------------------------------------
JACK R. Treasurer and Managing Director, New York Life Investment Management LLC
BENINTENDE Principal (since June 2007); Treasurer and Principal Financial and
5/12/64 Financial and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
Accounting MainStay VP Series Fund, Inc., and ICAP Funds, Inc. (since
Officer since June 2007); Vice President, Prudential Investments (2000 to
June 2007 2007); Assistant Treasurer, JennisonDryden Family of Funds,
Target Portfolio Trust, The Prudential Series Fund and
American
Skandia Trust (2006 to 2007); Treasurer and Principal
Financial Officer, The Greater China
Fund (2007)
-------------------------------------------------------------------------------------------------
STEPHEN P. President since Senior Managing Director and Chief Marketing Officer, New
FISHER March 2007 York Life Investment Management LLC (since 2005); Managing
2/22/59 Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since March 2007); Managing Director, UBS
Global Asset Management (1999 to 2003)
-------------------------------------------------------------------------------------------------
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration predecessor advisory organizations) (since 2000); Executive
2/8/59 since 2005 Vice President, New York Life Trust Company (since 2006);
Vice President--Administration, Eclipse Funds, Eclipse Funds
Inc. and MainStay VP Series Fund, Inc. (since 2005) and ICAP
Funds, Inc. (since 2006)
-------------------------------------------------------------------------------------------------
</Table>
36 MainStay Global High Income Fund
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Senior Managing Director and Chief Compliance Officer (since
MICUCCI President and 2006) and Managing Director and Chief Compliance Officer
12/16/65 Chief Compliance (2003 to 2006), New York Life Investment Management LLC and
Officer since New York Life Investment Management Holdings LLC; Senior
2006 Managing Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE Distributors
LLC; Chief Compliance Officer, NYLCAP Manager LLC (since
2006); Senior Vice President and Chief Compliance Officer,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund,
Inc., and ICAP Funds, Inc. (since 2006); Vice President--
Compliance, Eclipse Funds, Eclipse Funds Inc. and MainStay
VP Series Fund, Inc. (2004 to 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002)
-------------------------------------------------------------------------------------------------
MARGUERITE E.H. Secretary since Managing Director and Associate General Counsel, New York
MORRISON* 2004 Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC (since
2005); Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP Funds,
Inc. (since 2006); Chief Legal Officer--Mutual Funds and
Vice President and Corporate Counsel, The Prudential
Insurance Company of America (2000 to 2004)
-------------------------------------------------------------------------------------------------
</Table>
* In addition to serving as Secretary to the Trust, effective January 1, 2008,
Marguerite E.H. Morrison will assume the role of Chief Legal Officer to the
Trust.
Arphiela Arizmendi resigned as Treasurer and Principal Financial and Accounting
Officer of the Trust effective June 7, 2007.
Christopher O. Blunt resigned as President of the Trust effective March 12,
2007.
Alan J. Kirshenbaum resigned as Senior Vice President of the Trust effective
March 19, 2007.
www.mainstayfunds.com 37
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay 130/30 Core Fund
MainStay 130/30 Growth Fund
MainStay All Cap Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay 130/30 High Yield Fund(2)
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Institutional Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Principal Preservation Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay 130/30 International Fund
MainStay Global High Income Fund
MainStay ICAP International Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
RETIREMENT FUNDS
MainStay Retirement 2010 Fund
MainStay Retirement 2020 Fund
MainStay Retirement 2030 Fund
MainStay Retirement 2040 Fund
MainStay Retirement 2050 Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
New York, New York
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
Chicago, Illinois
MACKAY SHIELDS LLC(3)
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
MCMORGAN & COMPANY LLC(3)
San Francisco, California
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
(NEW YORK LIFE INVESTMENT MANAGEMENT LLC LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2007 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A011872 (RECYCLE LOGO) MS329-07 MSGH11-12/07
20
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
GOVERNMENT FUND
Message from the President
and
Annual Report
October 31, 2007
MESSAGE FROM
THE PRESIDENT
The 12-month period ended October 31, 2007, was a dynamic one for mutual fund
investors. U.S. equity markets generally advanced, with growth stocks out-
performing value stocks at all capitalization levels. Although past performance
is no guarantee of future results, international stocks as a whole provided even
stronger returns for U.S. investors.
The progress of the equity markets, however, was far from steady. In February,
weakness in Asian markets led to sharp price declines around the globe. The
correction caused many investors to reconsider whether China and other emerging
economies could sustain their rapid growth. Fortunately, strong
corporate-earnings reports and positive economic news helped the stock market
regain its footing.
In July and August, difficulties in the subprime-mortgage market led to another
stock-market correction. A number of high-profile mortgage originators either
closed their doors or were sold to larger entities. Other leading financial
services firms faced major write-offs because of subprime-mortgage exposure.
The Federal Open Market Committee (FOMC) took prompt action to increase
liquidity and stabilize the financial markets by lowering the discount rate and
the federal funds target rate during the reporting period. These Federal Reserve
moves helped calm investor concerns, and the stock market generally advanced
from August 16, 2007, the date of an unscheduled FOMC meeting, through the end
of October 2007.
Difficulties in the subprime-mortgage market led to a "flight to quality," or a
general movement toward fixed-income securities that carry lower risk. As demand
for short- and intermediate-term Treasury securities increased, yields fell
across much of the maturity spectrum. Yields rose, however, on 20-and 30-year
Treasury bonds, and the yield curve steepened during the 12-month reporting
period.
High-yield bonds rallied from November 2006 through May 2007. But in June and
July, the yield differences--or spreads--between high-yield bonds and comparable
Treasury securities began to widen. At the end of October 2007, these spreads
were wider than when the reporting period began, making high-yield securities
more attractive to investors willing to accept higher risk.
To help investors address the challenges of today's ever-changing markets, New
York Life Investment Management LLC provides access to seven institutional
investment boutiques, each with its own proprietary research and investment
culture. As advisors and subadvisors to MainStay Funds, these boutiques bring a
wealth of experience and market insight to our shareholders. The portfolio
managers of each MainStay Fund seek to consistently apply time-tested investment
principles across a wide variety of market environments.
The report that follows provides more specific information about the market
forces and investment decisions that affected your investment in MainStay Funds
from November 1, 2006, through October 31, 2007. Please read the report
carefully. As you do, bear in mind that this annual report reflects just a short
segment of your lifetime investment journey. We look forward to continuing to
work with you, wherever that journey may lead.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
GOVERNMENT FUND
MainStay Funds
Annual Report
October 31, 2007
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 14
- --------------------------------------------------------------------------------
Notes to Financial Statements 20
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 26
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 27
- --------------------------------------------------------------------------------
Federal Income Tax Information 29
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 29
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 29
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 29
- --------------------------------------------------------------------------------
Trustees and Officers 30
</Table>
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT
MONTH-END PERFORMANCE INFORMATION, PLEASE CALL 1-800-MAINSTAY (1-800-624-6782)
OR VISIT WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES--MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges -0.04% 2.05% 4.34%
Excluding sales charges 4.67 3.00 4.83
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
LEHMAN BROTHERS GOVERNMENT
MAINSTAY GOVERNMENT FUND BOND INDEX
------------------------ --------------------------
10/31/97 9550 10000
10482 11128
10301 10994
11043 11877
12606 13668
13199 14544
13453 14966
13937 15689
14019 15837
14616 16562
10/31/07 15299 17531
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges -1.23% 1.87% 4.04%
Excluding sales charges 3.77 2.22 4.04
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
LEHMAN BROTHERS GOVERNMENT
MAINSTAY GOVERNMENT FUND BOND INDEX
------------------------ --------------------------
10/31/97 10000 10000
10891 11128
10619 10994
11305 11877
12812 13668
13314 14544
13454 14966
13846 15689
13822 15837
14321 16562
10/31/07 14860 17531
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
With sales charges 2.89% 2.22% 4.04%
Excluding sales charges 3.89 2.22 4.04
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
LEHMAN BROTHERS GOVERNMENT
MAINSTAY GOVERNMENT FUND BOND INDEX
------------------------ --------------------------
10/31/97 10000 10000
10891 11128
10619 10994
11305 11877
12812 13668
13314 14544
13454 14966
13846 15689
13822 15837
14303 16562
10/31/07 14860 17531
</Table>
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect maximum applicable sales charges explained in this paragraph, change in
share price, and reinvestment of dividend and capital-gain distributions. The
graphs assume an initial investment of $10,000 and reflect the deduction of all
sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 4.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase and have an annual 12b-1 fee of 1.00%.
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee and are generally available to corporate and institutional investors
with a minimum initial investment of $5 million. Performance figures reflect
certain fee waivers and/or expense limitations, without which total returns may
have been lower. These fee waivers and/or expense limitations are contractual
and may be modified or terminated only with the approval of the Board of
Trustees. The Manager may recoup the amount of certain management fee waivers or
expense reimbursements from the Fund pursuant to the contract if such action
does not cause the Fund to exceed existing expense limitations and the
recoupment is made within three years after the year in which the Manager
incurred the expense. From inception (5/1/86) through 8/31/98, performance of
Class C shares (first offered 9/1/98) includes the historical performance of
Class B shares adjusted to reflect the applicable sales charge (or CDSC), fees,
estimated expenses and fee waivers/expense limitations of Class C shares upon
initial offer. From inception (5/1/98) through 12/31/03, performance of Class I
shares (first offered 1/2/04) includes the historical performance of Class B
shares, adjusted to reflect the fees and expenses of Class I shares. Unadjusted,
the performance shown for the newer classes of shares might have been lower.
THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS AND
SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
5.31% 3.42% 5.17%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
LEHMAN BROTHERS GOVERNMENT
MAINSTAY GOVERNMENT FUND BOND INDEX
------------------------ --------------------------
10/31/97 10000 10000
11008 11128
10829 10994
11646 11877
13340 13668
13998 14544
14285 14966
14847 15689
15007 15837
15724 16562
10/31/07 16559 17531
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- ------------------------------------------------------------------
Lehman Brothers(R) Government Bond Index(1) 5.85% 3.81% 5.77%
Average Lipper general U.S. government
fund(2) 4.12 2.92 4.84
</Table>
1. The Lehman Brothers(R) Government Bond Index is an unmanaged index that
consists of all publicly issued, nonconvertible debt of U.S. government
agencies, quasi-federal corporations, corporate or foreign debt guaranteed by
the U.S. government. Results assume reinvestment of all income and capital
gains. The Lehman Brothers Government Bond Index is considered to be the
Fund's broad-based securities-market index for comparison purposes. An
investment cannot be made directly in an index.
2. Lipper Inc. is an independent monitor of fund performance. Results are based
on total returns with all dividend and capital-gain distributions reinvested.
THE DISCLOSURE ON THE PRECEDING PAGE IS AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Government Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY GOVERNMENT FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2007, to October 31, 2007,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1,
2007, to October 31, 2007.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six-months ended October 31, 2007. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/07 10/31/07 PERIOD(1) 10/31/07 PERIOD(1)
CLASS A SHARES $1,000.00 $1,023.15 $5.35 $1,019.75 $5.35
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,018.10 $9.16 $1,016.00 $9.15
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,019.30 $9.16 $1,016.00 $9.15
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,027.30 $2.15 $1,022.90 $2.14
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's net annualized expense ratio of each class
(1.05% for Class A, 1.80% for Class B and Class C, and 0.42% for Class I)
multiplied by the average account value over the period, divided by 365 and
multiplied by 184 (to reflect the one-half year period).
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2007
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
U.S. Government & Federal Agencies 89.1
Short-Term Investments (collateral from securities lending 3.9
is 2.9%)
Mortgage-Backed Securities 3.8
Asset-Backed Securities 3.5
Corporate Bonds 1.7
Municipal Bond 0.6
Liabilities in Excess of Cash and Other Assets (2.6)
</Table>
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2007 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Federal National Mortgage Association, 4.00%,
due 9/2/08
2. Federal National Mortgage Association (Mortgage
Pass-Through Security), 4.50%, due 7/1/18
3. Federal Home Loan Mortgage Corporation, 5.25%,
due 11/5/12
4. Federal National Mortgage Association (Mortgage
Pass-Through Security), 5.50%, due 6/1/33
5. United States Treasury Bond, 6.25%, due 5/15/30
6. Federal National Mortgage Association (Mortgage
Pass-Through Security), 5.50%, due 2/1/17
7. Federal National Mortgage Association (Mortgage
Pass-Through Security), 5.00%, due 1/1/36
8. Federal National Mortgage Association (Mortgage
Pass-Through Security), 4.50%, due 11/1/18
9. United States Treasury Bond, 8.75%, due 8/15/20
10. Federal Home Loan Mortgage Corporation (Mortgage
Pass-Through Security), 5.50%, due 1/1/36
</Table>
8 MainStay Government Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Gary Goodenough and Joseph Portera of
MacKay Shields LLC
HOW DID MAINSTAY GOVERNMENT FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK
DURING THE 12 MONTHS ENDED OCTOBER 31, 2007?
Excluding all sales charges, MainStay Government Fund returned 4.67% for Class A
shares, 3.77% for Class B shares and 3.89% for Class C shares for the 12 months
ended October 31, 2007. Over the same period, the Fund's Class I shares returned
5.31%. Class A and Class I shares outperformed--and Class B and Class C shares
underperformed--the 4.12% return of the average Lipper(1) general U.S.
government fund for the 12-month reporting period. All share classes
underperformed the 5.85% return of the Lehman Brothers(R) Government Bond
Index,(2) the Fund's broad-based securities-market index, for the 12 months
ended October 31, 2007. See page 5 for Fund returns with sales charges.
DURING THE REPORTING PERIOD, HOW WAS THE FUND POSITIONED RELATIVE TO ITS PEERS?
In an effort to maximize yield per unit of duration in the Fund,(3) we
de-emphasized Treasury securities relative to our assessment of holdings in the
median Lipper peer fund. Instead, we placed greater emphasis on single- and
multifamily residential mortgage-backed securities and on debentures issued or
guaranteed by government housing enterprises. These overweight positions helped
the Fund maintain a yield advantage relative to its peers. We invested around
the core with no more than a 10% allocation to non-government-related
securities, diversified among asset-backed securities, commercial
mortgage-backed securities and corporate bonds. These noncore allocations were
also positive sources of yield.
During the reporting period, the U.S. economy decelerated and economic data was
somewhat erratic. To avoid being misled by fluctuating and unpredictable data
(which can affect the direction of interest rates) and to neutralize the impact
of changing Treasury yields, we held the Fund's duration close to our duration
estimate for the median Lipper peer fund.
The Fund held a relatively modest allocation to Treasury Inflation-Protected
Securities (TIPS) during the reporting period. This positioning detracted from
the Fund's performance relative to peer funds with higher TIPS allocations. As
the price of crude oil rose, TIPS traded higher and outperformed nominal
Treasurys.
HOW DID YOU SEEK TO ENHANCE THE FUND'S PERFORMANCE DURING THE REPORTING PERIOD?
Trading activity was modest during the reporting period. To maintain a stable
allocation to mortgage-backed securities, most of the trades involved the
reinvestment of principal prepayments back into the sector. We also sold several
of the Fund's positions in asset-backed securities when we saw little
opportunity for further spread contraction.(4)
Our tactical trades during the reporting period, such as expanding the Fund's
exposure to callable agency debentures, capitalized on the steeper yield curve
and the shift toward lower yields. Yields on shorter-term U.S. Treasury
securities fell during the reporting period, while yields on longer-term
Treasurys rose. This caused a steepening in the Treasury yield curve. It
appeared that investors in longer-maturity Treasurys were demanding greater
compensation when buying duration and that short-maturity buyers were trying to
anticipate Federal Open Market Committee cuts in the targeted federal funds
rate.
During the reporting period, the Fund's callable agency debentures served their
intended purpose as higher-yielding substitutes for short-duration Treasurys.
The Fund's allocation to Treasury securities, on the other hand, provided a
measure of stability during periods of market choppiness.
Investments in the Fund are not guaranteed, even though some of the Fund's
investments are guaranteed by the U.S. government or its agencies or
instrumentalities. The Fund may invest in derivatives, which may increase the
volatility of the Fund's net asset value and may result in a loss to the Fund.
The Fund may experience a portfolio turnover of more than 100% and may generate
taxable short-term capital gains. Funds that invest in bonds are subject to
interest-rate risk and can lose principal value when interest rates rise.
1. See footnote on page 6 for more information on Lipper Inc.
2. See footnote on page 6 for more information on the Lehman Brothers(R)
Government Bond Index.
3. Duration is a measure of the price sensitivity of fixed-income investments to
changes in interest rates. Duration is expressed as a number of years and is
considered a more accurate sensitivity gauge than average maturity.
4. The terms "spread" and "yield spread" may refer to the difference in yield
between a security or type of security and comparable U.S. Treasury issues.
The term may also refer to the difference in yield between two specific
securities or types of securities at a given time.
www.mainstayfunds.com 9
WHAT OTHER STRATEGIES DID YOU EMPLOY DURING THE REPORTING PERIOD AND HOW DID
THEY AFFECT FUND PERFORMANCE?
The Fund was overweight in mortgage-backed securities that were backed by
15-year loan terms and had cash-flow profiles amenable to a steeper yield curve.
The Fund had a lighter allocation to higher-coupon mortgage-backed securities
than the Lehman Brothers(R) Aggregate Bond Index, and this positioning detracted
from results during the reporting period. On the other hand, the Fund's
underweight position in Ginnie Maes benefited performance when these bonds
underperformed comparable Fannie Mae and Freddie Mac securities.
Homeowners had fewer refinancing options during the period. Tighter underwriting
standards and slower home equity growth led to a moderation in housing stock
turnover. Declining prepayment rates proved favorable for the Fund's
interest-only mortgage-backed securities, which tend to rise in value as their
principal base is preserved. The Fund also benefited from modest direct exposure
to securitizations of subprime residential mortgages. The impact on the Fund was
minimal.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecast
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
10 MainStay Government Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (98.7%)+
ASSET-BACKED SECURITIES (3.5%)
- ------------------------------------------------------------------------------
CONSUMER LOANS (0.8%)
Atlantic City Electric
Transition Funding LLC
Series 2002-1, Class A4
5.55%, due 10/20/23 $ 2,275,000 $ 2,245,319
------------
CREDIT CARDS (0.6%)
Chase Issuance Trust
Series 2006-C4, Class C4
5.381%, due 1/15/14 (a) 1,000,000 966,018
Citibank Credit Card Issuance Trust
Series 2006-C4, Class C4
5.345%, due 1/9/12 (a) 615,000 601,781
------------
1,567,799
------------
DIVERSIFIED FINANCIAL SERVICES (1.4%)
Massachusetts RRB
Special Purpose Trust
Series 2001-1, Class A
6.53%, due 6/1/15 3,812,991 4,012,171
------------
HOME EQUITY (0.7%)
Citicorp Residential Mortgage
Securities, Inc.
Series 2006-3, Class A3
5.61%, due 11/25/36 (b) 950,000 930,008
Series 2006-1, Class A3
5.706%, due 7/25/36 (b) 1,190,000 1,170,973
------------
2,100,981
------------
Total Asset-Backed Securities
(Cost $9,837,624) 9,926,270
------------
CORPORATE BONDS (1.7%)
- ------------------------------------------------------------------------------
INSURANCE (0.5%)
Fund American Cos., Inc.
5.875%, due 5/15/13 1,480,000 1,465,008
------------
MEDIA (1.2%)
TCI Communications, Inc.
8.75%, due 8/1/15 2,795,000 3,278,071
------------
Total Corporate Bonds
(Cost $4,799,824) 4,743,079
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MORTGAGE-BACKED SECURITIES (3.8%)
- ------------------------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (3.8%)
Banc of America Commercial
Mortgage, Inc.
Series 2005-5, Class A2
5.001%, due 10/10/45 $ 2,060,000 $ 2,049,346
Citigroup Commercial Mortgage Trust Series
2005-EMG, Class A1
4.154%, due 9/20/51 (c) 645,070 639,494
Series 2004-C2, Class A5
4.733%, due 10/15/41 2,000,000 1,908,772
Citigroup Mortgage Loan Trust, Inc.
Series 2006-AR6, Class 1A1
6.064%, due 8/25/36 (a) 1,225,758 1,232,277
Credit Suisse Mortgage Capital Certificates
Series 2006-C4, Class AJ
5.538%, due 9/15/39 (a) 1,550,000 1,486,226
Four Times Square Trust
Series 2006-4TS, Class A
5.401%, due 12/13/28 (c) 620,000 594,568
GS Mortgage Securities Corp. II
Series 2001-ROCK, Class A1
6.22%, due 5/3/18 (c) 1,626,346 1,658,013
LB-UBS Commercial Mortgage Trust
Series 2005-C7, Class A4
5.197%, due 11/15/30 300,000 292,625
Mortgage Equity Conversion Asset Trust Series
2007-FF2, Class A
4.66%, due 2/25/42 (a)(c)(d) 1,060,000 1,025,879
------------
Total Mortgage-Backed Securities
(Cost $11,160,292) 10,887,200
------------
MUNICIPAL BOND (0.6%)
- ------------------------------------------------------------------------------
TEXAS (0.6%)
Harris County Texas Industrial
Development Corp.
Solid Waste Deer Park
5.683%, due 3/1/23 (a) 1,720,000 1,705,294
------------
Total Municipal Bond
(Cost $1,731,942) 1,705,294
------------
U.S. GOVERNMENT & FEDERAL AGENCIES (89.1%)
- ------------------------------------------------------------------------------
FANNIE MAE
(COLLATERALIZED MORTGAGE OBLIGATION) (0.8%)
Series 2006-B1, Class AB
6.00%, due 6/25/16 2,239,404 2,261,927
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
- ------------------------------------------------------------------------------
FANNIE MAE GRANTOR TRUST
(COLLATERALIZED MORTGAGE OBLIGATIONS) (1.9%)
Series 2003-T1, Class B
4.491%, due 11/25/12 $ 3,865,000 $ 3,803,317
Series 1998-M6, Class A2
6.32%, due 8/15/08 (e) 1,541,066 1,545,109
------------
5,348,426
------------
FANNIE MAE STRIP
(COLLATERALIZED MORTGAGE OBLIGATIONS) (0.3%)
Series 360, Class 2, IO
5.00%, due 8/1/35 (f) 2,557,241 647,302
Series 361, Class 2, IO
6.00%, due 10/1/35 (f) 475,692 112,531
------------
759,833
------------
FEDERAL HOME LOAN BANK (3.8%)
5.125%, due 8/14/13 5,140,000 5,242,224
5.50%, due 7/15/36 5,400,000 5,614,979
------------
10,857,203
------------
FEDERAL HOME LOAN MORTGAGE CORPORATION (4.9%)
4.75%, due 11/17/15 1,615,000 1,602,954
V 5.25%, due 11/5/12 10,900,000 10,900,403
6.00%, due 6/5/17 1,500,000 1,508,912
------------
14,012,269
------------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(MORTGAGE PASS-THROUGH SECURITIES) (12.0%)
3.00%, due 8/1/10 4,171,219 4,001,216
4.311%, due 3/1/35 (a) 196,010 193,411
5.00%, due 1/1/20 1,294,385 1,278,103
5.00%, due 6/1/33 5,496,394 5,298,262
5.00%, due 8/1/33 3,939,383 3,791,433
5.00%, due 5/1/36 5,131,097 4,925,803
5.50%, due 1/1/21 3,257,251 3,262,979
5.50%, due 11/1/35 2,165,444 2,134,201
V 5.50%, due 1/1/36 7,174,982 7,071,464
5.50%, due 11/1/36 820,073 807,408
5.663%, due 2/1/37 (a) 456,311 461,469
6.50%, due 4/1/37 966,939 990,325
------------
34,216,074
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (7.9%)
V 4.00%, due 9/2/08 17,630,000 17,552,252
5.50%, due 1/18/12 1,400,000 1,402,989
6.625%, due 9/15/09 3,505,000 3,647,461
------------
22,602,702
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (41.2%)
V 4.50%, due 7/1/18 $14,918,052 $ 14,471,382
V 4.50%, due 11/1/18 9,033,224 8,762,755
5.00%, due 9/1/17 5,583,947 5,520,255
5.00%, due 9/1/20 814,736 802,577
V 5.00%, due 1/1/36 9,280,928 8,916,888
5.00%, due 2/1/36 3,704,794 3,559,475
5.00%, due 6/1/36 750,740 720,714
5.302%, due 4/1/34 (a) 1,572,248 1,588,174
5.50%, due 1/1/17 406,428 408,596
V 5.50%, due 2/1/17 8,943,698 8,995,425
5.50%, due 6/1/19 2,920,735 2,930,142
5.50%, due 11/1/19 2,933,129 2,942,575
5.50%, due 4/1/21 6,533,507 6,547,118
V 5.50%, due 6/1/33 10,806,231 10,679,133
5.50%, due 11/1/33 4,805,180 4,748,664
5.50%, due 12/1/33 5,452,008 5,387,884
5.50%, due 6/1/34 1,925,988 1,902,016
5.50%, due 12/1/34 1,145,294 1,131,039
5.50%, due 7/1/37 1,047,043 1,031,793
6.00%, due 12/1/16 717,490 731,388
6.00%, due 11/1/32 2,519,827 2,551,777
6.00%, due 1/1/33 1,760,623 1,781,617
6.00%, due 3/1/33 2,015,833 2,038,087
6.00%, due 9/1/34 523,175 528,180
6.00%, due 9/1/35 4,590,685 4,631,159
6.00%, due 10/1/35 1,253,744 1,264,331
6.00%, due 6/1/36 4,654,038 4,689,194
6.00%, due 11/1/36 4,609,987 4,644,810
6.00%, due 4/1/37 1,423,238 1,423,570
6.50%, due 10/1/31 1,156,983 1,192,006
6.50%, due 2/1/37 1,159,509 1,186,828
------------
117,709,552
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (2.0%)
6.00%, due 8/15/32 1,992,972 2,023,553
6.00%, due 12/15/32 1,256,706 1,275,484
6.50%, due 8/15/28 695,218 718,532
6.50%, due 4/15/31 1,727,117 1,783,049
------------
5,800,618
------------
HVIDE VAN OMMEREN TANKERS LLC (1.9%)
Series I
7.54%, due 12/14/23 (g) 2,615,000 2,771,482
Series II
7.54%, due 12/14/23 (g) 2,617,000 2,773,601
------------
5,545,083
------------
OVERSEAS PRIVATE INVESTMENT CORPORATION (1.3%)
5.142%, due 12/15/23 (g) 3,700,000 3,736,075
------------
</Table>
12 MainStay Government Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
- ------------------------------------------------------------------------------
TENNESSEE VALLEY AUTHORITY (1.8%)
4.65%, due 6/15/35 (g) $ 5,605,000 $ 5,172,496
------------
UNITED STATES TREASURY BONDS (7.2%)
6.25%, due 8/15/23 515,000 597,722
V 6.25%, due 5/15/30 (h) 8,265,000 9,938,018
6.875%, due 8/15/25 1,410,000 1,756,883
V 8.75%, due 8/15/20 5,860,000 8,122,054
------------
20,414,677
------------
UNITED STATES TREASURY NOTES (2.1%)
2.00%, due 7/15/14 T.I.P. (h)(i) 4,412,360 4,410,983
4.75%, due 5/31/12 (h) 1,650,000 1,692,926
------------
6,103,909
------------
Total U.S. Government & Federal Agencies
(Cost $254,338,840) 254,540,844
------------
Total Long-Term Bonds
(Cost $281,868,522) 281,802,687
------------
SHORT-TERM INVESTMENTS (3.9%)
- ------------------------------------------------------------------------------
COMMERCIAL PAPER (0.3%)
Societe Generale North America, Inc.
4.685%, due 11/6/07 1,000,000 999,349
------------
Total Commercial Paper
(Cost $999,349) 999,349
------------
FEDERAL AGENCY (0.7%)
Federal Home Loan Bank (Discount Note)
4.40%, due 11/1/07 2,105,000 2,105,000
------------
Total Federal Agency
(Cost $2,105,000) 2,105,000
------------
<Caption>
SHARES VALUE
INVESTMENT COMPANY (2.9%)
State Street Navigator Securities Lending Prime
Portfolio (j) 8,185,218 $ 8,185,218
------------
Total Investment Company
(Cost $8,185,218) 8,185,218
------------
Total Short-Term Investments
(Cost $11,289,567) 11,289,567
------------
Total Investments
(Cost $293,158,089) 102.6% 293,092,254(k)
Liabilities in Excess of
Cash and Other Assets (2.6) (7,444,660)
----------- ------------
Net Assets 100.0% $285,647,594
=========== ============
</Table>
<Table>
(a) Floating rate. Rate shown is the rate in effect at October
31, 2007.
(b) Sub-prime mortgage investment. The total market value of
these securities at October 31, 2007 is $2,100,981, which
represents 0.7% of the Fund's net assets.
(c) May be sold to institutional investors only under Rule 144a
or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(d) Fair valued security. The total market value of the security
at October 31, 2007 is $1,025,879, which reflects 0.4% of
the Fund's net assets.
(e) ACES--Alternative Credit Enhancement Structure.
(f) Collateralized Mortgage Obligation Interest Only Strip--Pays
a fixed or variable rate of interest based on mortgage loans
or mortgage pass-through securities. The principal amount of
the underlying pool represents the notional amount on which
the current interest is calculated. The value of these
stripped securities may be particularly sensitive to changes
in prevailing interest rates and are typically more
sensitive to changes in prepayment rates than traditional
mortgage-backed securities.
(g) United States Government Guaranteed Security.
(h) Represents a security, or a portion thereof, which is out on
loan. The aggregate market value of such securities is
$8,010,131; cash collateral of $8,185,218 (included in
liabilities) was received with which the Fund purchased
highly liquid short-term investments.
(i) Treasury Inflation Protected Security--Pays a fixed rate of
interest on a principal amount that is continuously adjusted
for inflation based on the Consumer Price Index-Urban
Consumers.
(j) Represents a security, or a portion thereof, purchased with
cash collateral received for securities on loan.
(k) At October 31, 2007, cost is $293,171,515 for federal income
tax purposes and net unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 2,668,619
Gross unrealized depreciation (2,747,880)
-------------------
Net unrealized depreciation $ (79,261)
===================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 13
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2007
<Table>
ASSETS:
Investment in securities, at value (identified
cost $293,158,089) including $8,010,131
market value of securities loaned $293,092,254
Cash 5,556
Receivables:
Dividends and interest 2,369,250
Fund shares sold 97,677
Investment securities sold 12,228
Other assets 15,647
-------------
Total assets 295,592,612
-------------
LIABILITIES:
Securities lending collateral 8,185,218
Payables:
Investment securities purchased 1,026,222
Transfer agent (See Note 3) 185,292
Fund shares redeemed 125,347
NYLIFE Distributors (See Note 3) 103,682
Manager (See Note 3) 96,751
Shareholder communication 59,149
Professional fees 20,573
Custodian 10,207
Trustees 3,979
Accrued expenses 3,891
Dividend payable 124,707
-------------
Total liabilities 9,945,018
-------------
Net assets $285,647,594
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized $ 348,057
Additional paid-in capital 298,679,094
-------------
299,027,151
Accumulated undistributed net investment
income 63,360
Accumulated net realized loss on investments (13,377,082)
Net unrealized depreciation on investments (65,835)
-------------
Net assets $285,647,594
=============
CLASS A
Net assets applicable to outstanding shares $227,895,909
=============
Shares of beneficial interest outstanding 27,765,893
=============
Net asset value per share outstanding $ 8.21
Maximum sales charge (4.50% of offering price) 0.39
-------------
Maximum offering price per share outstanding $ 8.60
=============
CLASS B
Net assets applicable to outstanding shares $ 50,123,448
=============
Shares of beneficial interest outstanding 6,109,601
=============
Net asset value and offering price per share
outstanding $ 8.20
=============
CLASS C
Net assets applicable to outstanding shares $ 7,620,924
=============
Shares of beneficial interest outstanding 929,320
=============
Net asset value and offering price per share
outstanding $ 8.20
=============
CLASS I
Net assets applicable to outstanding shares $ 7,313
=============
Shares of beneficial interest outstanding 885
=============
Net asset value and offering price per share
outstanding $ 8.26
=============
</Table>
14 MainStay Government Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2007
<Table>
INVESTMENT INCOME:
INCOME:
Interest $15,291,016
Income from securities loaned--net 24,066
------------
Total income 15,315,082
------------
EXPENSES:
Manager (See Note 3) 1,762,637
Transfer agent--Classes A, B and C (See Note
3) 1,109,607
Transfer agent--Class I (See Note 3) 12
Distribution/Service--Class A (See Note 3) 580,245
Distribution--Class B (See Note 3) 419,087
Distribution--Class C (See Note 3) 43,442
Service--Class B (See Note 3) 139,696
Service--Class C (See Note 3) 14,481
Professional fees 83,152
Shareholder communication 70,562
Registration 61,044
Recordkeeping 56,044
Custodian 38,421
Trustees 17,193
Miscellaneous 17,278
------------
Total expenses before waiver/reimbursement 4,412,901
Expense waiver/reimbursement from Manager
(See Note 3) (866,712)
------------
Net expenses 3,546,189
------------
Net investment income 11,768,893
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (154,751)
------------
Net change in unrealized depreciation on
investments 1,084,516
------------
Net realized and unrealized gain on investments 929,765
------------
Net increase in net assets resulting from
operations $12,698,658
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 15
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2007 AND OCTOBER 31, 2006
<Table>
<Caption>
2007 2006
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 11,768,893 $ 12,389,192
Net realized loss on investments (154,751) (2,241,090)
Net change in unrealized
depreciation on investments 1,084,516 2,438,770
---------------------------
Net increase in net assets
resulting from operations 12,698,658 12,586,872
---------------------------
Dividends to shareholders:
From net investment income:
Class A (9,996,496) (8,842,446)
Class B (1,989,403) (3,371,593)
Class C (208,063) (207,911)
Class I (214) (314)
---------------------------
Total dividends to shareholders (12,194,176) (12,422,264)
---------------------------
Capital share transactions:
Net proceeds from sale of shares 28,537,870 32,757,811
Net asset value of shares issued
to shareholders in reinvestment
of dividends 10,626,144 10,455,669
Cost of shares redeemed (63,344,702) (93,224,138)
Net asset value of shares
converted
(See Note 1):
Class A 7,137,927 185,002,360
Class B (7,137,927) (185,002,360)
---------------------------
Decrease in net assets derived
from capital share transactions (24,180,688) (50,010,658)
---------------------------
Net decrease in net assets (23,676,206) (49,846,050)
NET ASSETS:
Beginning of year 309,323,800 359,169,850
---------------------------
End of year $285,647,594 $309,323,800
===========================
Accumulated undistributed net
investment income at end of year $ 63,360 $ 251,832
===========================
</Table>
16 MainStay Government Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
www.mainstayfunds.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning
of period $ 8.19 $ 8.18 $ 8.40 $ 8.42 $ 8.67 $ 8.25
-------- -------- ------- ------- ----------- ------------
Net investment income 0.34 (a) 0.33 (a) 0.26 0.25 0.20 0.32
Net realized and unrealized
gain (loss) on investments 0.03 0.01 (0.21) 0.05 (0.16) 0.47
-------- -------- ------- ------- ----------- ------------
Total from investment
operations 0.37 0.34 0.05 0.30 0.04 0.79
-------- -------- ------- ------- ----------- ------------
Less dividends and
distributions:
From net investment income (0.35) (0.33) (0.27) (0.28) (0.29) (0.37)
Return of capital -- -- -- (0.04) -- --
-------- -------- ------- ------- ----------- ------------
Total dividends and
distributions (0.35) (0.33) (0.27) (0.32) (0.29) (0.37)
-------- -------- ------- ------- ----------- ------------
Net asset value at end of
period $ 8.21 $ 8.19 $ 8.18 $ 8.40 $ 8.42 $ 8.67
======== ======== ======= ======= =========== ============
Total investment return (b) 4.67% 4.26% 0.59% 3.60% 0.50%(c) 9.75%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 4.16% 4.04% 3.09% 2.96% 2.85%+ 3.76%
Net expenses 1.05% 1.05% 1.05% 1.25% 1.25%+ 1.19%
Expenses (before
waiver/reimbursement) 1.35% 1.34% 1.34% 1.27% 1.25%+ 1.19%
Portfolio turnover rate 11% 83%(d) 164%(d) 110% 99% 117%
Net assets at end of period
(in 000's) $227,896 $239,392 $76,816 $86,516 $99,852 $92,581
</Table>
<Table>
<Caption>
CLASS C
-----------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning
of period $ 8.18 $ 8.17 $ 8.39 $ 8.40 $ 8.66 $ 8.24
------ ------ ------ ------ ----------- ------------
Net investment income 0.28 (a) 0.26 (a) 0.20 0.17 0.14 0.26
Net realized and unrealized
gain (loss) on investments 0.03 0.02 (0.21) 0.07 (0.16) 0.46
------ ------ ------ ------ ----------- ------------
Total from investment
operations 0.31 0.28 (0.01) 0.24 (0.02) 0.72
------ ------ ------ ------ ----------- ------------
Less dividends and
distributions:
From net investment income (0.29) (0.27) (0.21) (0.21) (0.24) (0.30)
Return of capital -- -- -- (0.04) -- --
------ ------ ------ ------ ----------- ------------
Total dividends and
distributions (0.29) (0.27) (0.21) (0.25) (0.24) (0.30)
------ ------ ------ ------ ----------- ------------
Net asset value at end of
period $ 8.20 $ 8.18 $ 8.17 $ 8.39 $ 8.40 $ 8.66
====== ====== ====== ====== =========== ============
Total investment return (b) 3.89% 3.48% (0.17%) 2.92% (0.25%)(c) 8.94%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 3.41% 3.29% 2.34% 2.21% 2.10%+ 3.01%
Net expenses 1.80% 1.80% 1.80% 2.00% 2.00%+ 1.94%
Expenses (before
waiver/reimbursement) 2.10% 2.09% 2.09% 2.02% 2.00%+ 1.94%
Portfolio turnover rate 11% 83%(d) 164%(d) 110% 99% 117%
Net assets at end of period
(in 000's) $7,621 $5,684 $7,772 $8,620 $12,385 $17,940
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges. Class I is not subject to sales
charges.
(c) Total return is not annualized.
(d) The portfolio turnover rate not including mortgage dollar rolls is 32% and 31% for the
years ended October 31, 2006 and October 31, 2005, respectively.
</Table>
18 MainStay Government Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
-----------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED,
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
$ 8.19 $ 8.17 $ 8.39 $ 8.40 $ 8.66 $ 8.24
------- ------- -------- -------- ----------- ------------
0.28 (a) 0.26 (a) 0.20 0.17 0.14 0.26
0.02 0.03 (0.21) 0.07 (0.16) 0.46
------- ------- -------- -------- ----------- ------------
0.30 0.29 (0.01) 0.24 (0.02) 0.72
------- ------- -------- -------- ----------- ------------
(0.29) (0.27) (0.21) (0.21) (0.24) (0.30)
-- -- -- (0.04) -- --
------- ------- -------- -------- ----------- ------------
(0.29) (0.27) (0.21) (0.25) (0.24) (0.30)
------- ------- -------- -------- ----------- ------------
$ 8.20 $ 8.19 $ 8.17 $ 8.39 $ 8.40 $ 8.66
======= ======= ======== ======== =========== ============
3.77% 3.60% (0.17%) 2.92% (0.25%)(c) 8.94%
3.41% 3.29% 2.34% 2.21% 2.10%+ 3.01%
1.80% 1.80% 1.80% 2.00% 2.00%+ 1.94%
2.10% 2.09% 2.09% 2.02% 2.00%+ 1.94%
11% 83%(d) 164%(d) 110% 99% 117%
$50,123 $64,246 $274,566 $333,884 $408,180 $477,341
</Table>
<Table>
<Caption>
CLASS I
-----------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2007 2006 2005 2004
$ 8.24 $ 8.21 $ 8.41 $ 8.44
------ ------ ------ -----------
0.40 (a) 0.35 (a) 0.37 0.29
0.02 0.03 (0.28) (0.04)
------ ------ ------ -----------
0.42 0.38 0.09 0.25
------ ------ ------ -----------
(0.40) (0.35) (0.29) (0.28)
-- -- -- --
------ ------ ------ -----------
(0.40) (0.35) (0.29) (0.28)
------ ------ ------ -----------
$ 8.26 $ 8.24 $ 8.21 $ 8.41
====== ====== ====== ===========
5.31% 4.78% 1.08% 2.99%(c)
4.84% 4.52% 3.47% 3.34%+
0.42% 0.57% 0.67% 0.87%+
1.00% 0.86% 0.96% 0.89%+
11% 83%(d) 164%(d) 110%
$ 7 $ 1 $ 16 $ 26
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises nineteen funds (collectively referred to as the
"Funds"). These financial statements and notes relate only to MainStay
Government Fund (the "Fund"), a diversified fund.
The Fund currently offers four classes of shares. Class A shares commenced on
January 3, 1995. Class B shares commenced on May 1, 1986. Class C shares
commenced on September 1, 1998. Class I shares commenced on January 2, 2004.
Class A shares are offered at net asset value per share plus an initial sales
charge. No sales charge applies on investments of $1 million or more (and
certain other qualified purchases) in Class A shares, but a contingent deferred
sales charge is imposed on certain redemptions of such shares within one year of
the date of purchase. Class B shares and Class C shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within up to six years of purchase of Class B
shares and a 1% contingent deferred sales charge may be imposed on redemptions
made within one year of purchase of Class C shares. Class I shares are not
subject to a sales charge. As approved by the Board of Trustees in 1997, Class B
shares convert to Class A shares eight years after the date they were purchased.
The four classes of shares bear the same voting (except for issues that relate
solely to one class), dividend, liquidation and other rights and conditions
except that Class B and Class C shares are subject to higher distribution fee
rates than Class A shares under a distribution plan pursuant to Rule 12b-1 under
the 1940 Act. Class I shares are not subject to a distribution or service fee.
The Fund's investment objective is to seek a high level of current income,
consistent with safety of principal.
The ability of issuers of debt securities held by the Fund to meet their
obligations may be affected by economic developments in a specific industry or
region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent or brokers selected by the Fund's Manager, as defined in Note 3,
whose prices reflect broker/dealer supplied valuations and electronic data
processing techniques, if such prices are deemed by the Fund's Manager to be
representative of market values, at the regular close of trading of the New York
Stock Exchange (generally 4:00 p.m. Eastern time) on each day the Fund is open
for business. Investments in mutual funds are valued at their net asset value as
of the close of the New York Stock Exchange on the date of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: a security the trading for which has been
halted or suspended; a debt security that has recently gone into default and for
which there is not a current market quotation; a security of an issuer that has
entered into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; a security where the trading on that security's principal market
is temporarily closed at a time when, under normal conditions, it would be open.
At October 31, 2007, the Fund held securities with a value of $1,025,879, that
were valued in such a manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
of net investment income monthly and distributions of net realized capital and
currency gains, if any, annually. All dividends and distributions are reinvested
in shares of the Fund, at net asset value, unless the shareholder elects
otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America. Permanent
book/tax differences relating to
20 MainStay Government Fund
income and gains are reclassified amongst undistributed net investment income,
accumulated net realized gain or loss and paid-in-capital.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method and includes gains
and losses from repayments of principal on mortgage-backed securities. Interest
income is accrued as earned using the effective interest rate method. Discounts
and premiums on securities purchased, other than short-term securities, for the
Fund are accreted and amortized, respectively, on the effective interest rate
method over the life of the respective securities or, in the case of a callable
security, over the period to the first date of call. Discounts and premiums on
short-term securities are accreted and amortized, respectively, on the straight
line method. Income from payment-in-kind securities is recorded daily based on
the effective interest method of accrual.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B) on
page 22) are allocated to separate classes of shares pro rata based upon their
relative net assets value on the date the expenses are incurred. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) MORTGAGE DOLLAR ROLLS. The Fund enters into mortgage dollar roll ("MDR")
transactions in which it sells mortgage-backed securities ("MBS") from its
portfolio to a counterparty from whom it simultaneously agrees to buy a similar
security on a delayed delivery basis. The MDR transactions of the Fund are
classified as purchase and sale transactions. The securities sold in connection
with the MDRs are removed from the portfolio and a realized gain or loss is
recognized. The securities the Fund has agreed to acquire are included at market
value in the Portfolio of Investments and liabilities for such purchase
commitments are included as payables for investments purchased. During the roll
period, the Fund forgoes principal and interest paid on the securities. The Fund
is compensated by the difference between the current sales price and the forward
price for the future as well as by the earnings on the cash proceeds of the
initial sale. MDRs may be renewed without physical delivery of the securities
subject to the contract. The Fund maintains liquid assets from its portfolio
having a value not less than the repurchase price, including accrued interest.
MDR transactions involve certain risks, including the risk that the MBS returned
to the Fund at the end of the roll, while substantially similar, could be
inferior to what was initially sold to the counterparty.
(H) SECURITIES LENDING. In order to realize additional income the Fund may lend
its securities to broker-dealers and financial institutions. The loans are
collateralized by cash or securities at least equal at all times to the market
value of the securities loaned. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. The Fund may bear
the risk of delay in recovery of, or loss of rights in, the securities loaned
should the borrower of the securities experience financial difficulty. The Fund
receives compensation for lending its securities in the form of fees or it
retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(I) INDEMNIFICATIONS. In the normal course of business, the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote.
However, there can be no assurance that material liabilities related to such
obligations will not arise in the future which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager") a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. NYLIM provides offices and conducts clerical, recordkeeping and
bookkeeping services, and is responsible for the financial and accounting
records required to be maintained by the Fund. NYLIM also pays the salaries and
expenses of all
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
personnel affiliated with the Fund and all the operational expenses that are not
the responsibility of the Fund. MacKay Shields LLC (the "Subadvisor"), a
registered investment adviser and an indirect wholly-owned subsidiary of New
York Life, serves as subadvisor to the Fund and is responsible for the
day-to-day portfolio management of the Fund. Pursuant to the terms of a
Subadvisory Agreement between NYLIM and the Subadvisor, NYLIM pays for the
services of the Subadvisor.
The Fund is contractually obligated to pay NYLIM a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.60% on assets up to $1 billion and 0.55% on assets in
excess of $1 billion. NYLIM has also contractually agreed to waive a portion of
its management fee by 0.10% to 0.50% on assets up to $1 billion and to 0.45% on
assets in excess of $1 billion, which is not recoupable.
Effective March 1, 2007, NYLIM has entered into a written expense limitation
agreement under which it has agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses (total annual operating expenses
excluding taxes, interest, litigation, extraordinary expenses, and brokerage and
other transaction expenses relating to the purchase or sale of portfolio
investments) do not exceed the following amounts of average daily net assets for
each class: Class A, 1.05%; Class B, 1.80%; Class C, 1.80%; and Class I, 0.40%.
This expense limitation may be modified or terminated only with the approval of
the Board of Trustees. NYLIM may recoup the amount of any management fee waivers
or expense reimbursements from the Fund pursuant to the agreement if such action
does not cause the Fund to exceed existing expense limitations and the
recoupment is made within three years after the year in which NYLIM incurred the
expense.
For the year ended October 31, 2007, NYLIM earned fees from the Fund in the
amount of $1,762,637 and waived its fees in the amount of $866,712 of which
$572,938 is recoupable.
As of October 31, 2007, the amounts of waived fees that are subject to possible
recoupment by NYLIM, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 2010 TOTAL
$302,892 $643,616 $572,938 $1,519,446
- ------------------------------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Prior to March 1, 2007, NYLIM had an agreement in place under which it had
agreed to waive a portion of the Fund's management fee or reimburse the expenses
of the Fund so that the Fund's total ordinary operating expenses did not exceed
1.05% of the Fund's average daily net assets for its Class A shares. NYLIM also
applied an equivalent waiver or reimbursement, in an equal amount of basis
points, to the other share classes of the Fund.
State Street Bank & Trust Company ("SSBT"), One Lincoln Street, Boston,
Massachusetts, 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with NYLIM. These services include calculating
daily net asset values of the Fund, maintaining general ledger and sub-ledger
accounts for the calculation of the Fund's respective net asset values, and
assisting NYLIM in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, SSBT is compensated by
NYLIM.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, other than Class I shares, has adopted distribution plans
(the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940
Act.
Pursuant to the Class A Plan, the Distributor receives a monthly distribution
fee from the Fund at an annual rate of 0.25% of the average daily net assets of
the Fund's Class A shares, which is an expense of the Class A shares of the Fund
for distribution or service activities as designated by the Distributor.
Pursuant to the Class B and Class C Plans, the Fund pays the Distributor a
monthly distribution fee, which is an expense of the Class B and Class C shares
of the Fund, at the annual rate of 0.75% of the average daily net assets of the
Fund's Class B and Class C shares. The Plans provide that the Class B and Class
C shares of the Fund also incur a service fee at the annual rate of 0.25% of the
average daily net asset value of the Class B and Class C shares of the Fund.
Class I shares are not subject to a distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $16,032 for the year ended
October 31, 2007. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $1,704, $93,528 and $1,876, respectively, for the year ended October
31, 2007.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with
22 MainStay Government Fund
Boston Financial Data Services pursuant to which it performs certain services
for which NYLIM Service is responsible. Transfer agent expenses incurred by the
Fund, for the year ended October 31, 2007, amounted to $1,109,619.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts, effective March 1, 2007. Shareholders with an account
balance of less than $1,000 are charged an annual per account fee of $20
(assessed semi-annually).
(F) CAPITAL. At October 31, 2007, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $ 180 0.0*%
- -------------------------------------------------------------
Class C 111 0.0*
- -------------------------------------------------------------
Class I 1,113 15.2
- -------------------------------------------------------------
</Table>
* Less than one-tenth of a percent.
(G) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2007, these fees, which are included in professional fees
shown on the Statement of Operations, were $10,922.
The Fund pays the Manager a monthly fee for certain pricing and recordkeeping
services provided under the Accounting Agreement at the annual rate of 1/20 of
1% for the first $20 million of average monthly net assets, 1/30 of 1% of the
next $80 million of average monthly net assets and 1/100 of 1% of any amount in
excess of $100 million of average monthly net assets. Fees for these services
provided to the Fund by the Manager amounted to $56,044 for the year ended
October 31, 2007.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2007, the components of accumulated gain/loss on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$201,493 $(13,377,082) $(124,707) $(79,261) $(13,379,557)
---------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to premium amortization adjustments.
The other temporary differences are primarily due to distribution payable.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated net realized
loss on investments, arising from permanent differences; net assets at October
31, 2007 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT GAIN (LOSS) ADDITIONAL
INCOME (LOSS) ON INVESTMENTS PAID-IN CAPITAL
$236,811 $ 29,168,585 $ (29,405,396)
-------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to paydowns gain (loss) and
expiration of capital loss carryforwards.
At October 31, 2007, for federal income tax purposes, capital loss carryforwards
of $13,377,081 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains through the years
indicated. To the extent that these loss carryforwards are used to offset future
capital gains, it is probable that the capital gains so offset will not be
distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2008 $ 6,930
2012 3,458
2014 2,598
2015 391
-----------------------------------
$13,377
-----------------------------------
</Table>
The Fund had $29,405,396 of capital loss carryforwards that expired.
The tax character of distributions paid during the years ended October 31, 2007
and October 31, 2006, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2007 2006
Distributions paid from:
Ordinary Income $12,194,176 $12,422,264
- -----------------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
SSBT is the custodian of cash and securities of the Fund. Custodial fees are
charged to the Fund based on the market value of securities in the Fund and the
number of certain cash transactions incurred by the Fund.
NOTE 6--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. These funds pay a commitment fee, at an annual
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
rate of .060% of the average commitment amount, regardless of usage, to The Bank
of New York, which acts as agent to the syndicate. Such commitment fees are
allocated among the funds based upon net assets and other factors. Interest on
any revolving credit loan is charged based upon the Federal Funds Advances rate.
There were no borrowings made or outstanding on the line of credit during the
year ended October 31, 2007.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2007, purchases and sales of U. S. Government
securities were $25,725 and $49,926, respectively. Purchases and sales of
securities, other than U.S. Government securities and short-term securities,
were $6,897 and $9,669, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 2,304 $ 18,818
Shares issued to shareholders in
reinvestment of dividends: 1,067 8,702
Shares redeemed (5,708) (46,589)
----------------------
Net decrease in shares outstanding
before conversion (2,337) (19,069)
Shares converted from Class B (See Note
1) 878 7,138
----------------------
Net decrease (1,459) $ (11,931)
======================
Year ended October 31, 2006:
Shares sold 3,152 $ 25,589
Shares issued to shareholders in
reinvestment of dividends: 949 7,705
Shares redeemed (6,771) (55,003)
----------------------
Net increase (decrease) in shares
outstanding before conversion (2,670) (21,709)
Shares converted from Class B (See Note
1) 22,506 185,002
----------------------
Net increase 19,836 $ 163,293
======================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 714 $ 5,822
Shares issued to shareholders in
reinvestment of dividends: 218 1,778
Shares redeemed (1,791) (14,626)
----------------------
Net decrease in shares outstanding
before conversion (859) (7,026)
Shares reacquired upon conversion into
Class A (See Note 1) (878) (7,138)
----------------------
Net decrease (1,737) $ (14,164)
======================
Year ended October 31, 2006:
Shares sold 754 $ 6,134
Shares issued to shareholders in
reinvestment of dividends: 320 2,603
Shares redeemed (4,298) (34,929)
----------------------
Net decrease in shares outstanding
before conversion (3,224) (26,192)
Shares reacquired upon conversion into
Class A (See Note 1) (22,534) (185,002)
----------------------
Net decrease (25,758) $(211,194)
======================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 477 $3,888
Shares issued to shareholders in
reinvestment of dividends: 18 146
Shares redeemed (261) (2,126)
------------------
Net increase 234 $1,908
==================
Year ended October 31, 2006:
Shares sold 128 $1,035
Shares issued to shareholders in
reinvestment of dividends: 18 147
Shares redeemed (402) (3,277)
------------------
Net decrease (256) $(2,095)
==================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 1 $ 10
Shares issued to shareholders in
reinvestment of dividends: --(a) --(a)
Shares redeemed --(a) (4)
------------------
Net increase 1 $ 6
==================
Year ended October 31, 2006:
Shares issued to shareholders in
reinvestment of dividends: --(a) $ --(a)
Shares redeemed (2) (15)
------------------
Net decrease (2) $ (15)
==================
</Table>
(a) Less than one thousand.
24 MainStay Government Fund
NOTE 9--OTHER MATTERS:
In 2004 the Securities and Exchange Commission ("SEC") raised concerns relating
to a guarantee provided to shareholders of the MainStay Government Fund and the
fees and expenses of that Fund, as well as the related guaranteed disclosure to
that fund's shareholders. Discussions have been held with the SEC concerning a
possible resolution of this matter. There can be no assurance at this time as to
the outcome of these efforts.
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS:
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes", an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation becomes effective for the Fund's 2008 fiscal
year, and is to be applied to all open tax years as of the date of
effectiveness. Based on Management's analysis, the determination has been made
that the adoption of the interpretation on November 1, 2007, did not have an
impact on the Fund's financial statements upon adoption. Management continually
reviews the Fund's tax positions and such conclusions under the Interpretation
based on factors, including, but not limited to, ongoing analyses of tax laws,
regulations and interpretations, thereof.
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The changes to current generally accepted accounting
principles from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures
about fair value measurements. As of October 31, 2007, the Fund does not believe
the adoption of SFAS No. 157 will impact the amounts reported in the Fund's
financial statements. However, additional disclosures may be required about the
inputs used to develop the measurements and the effect of certain measurements
reported in the financial statements for a fiscal period.
www.mainstayfunds.com 25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Government Fund ("the Fund"), one
of the funds constituting The MainStay Funds, as of October 31, 2007, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years or periods in the four-year
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the periods presented through October 31,
2003, were audited by other auditors, whose report dated December 18, 2003,
expressed an unqualified opinion thereon.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2007, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Government Fund of The MainStay Funds as of October 31, 2007, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years or periods in the four-year period then ended,
in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 20, 2007
26 MainStay Government Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with New York Life Investment Management LLC (the "Manager") and the
Subadvisory Agreement between the Manager and MacKay Shields LLC, a wholly-owned
indirect subsidiary of New York Life Investment Management Holdings LLC, an
affiliate of the Manager, (the "Subadvisor"), (each an "Agreement") at a meeting
held on May 22 and 23, 2007. In connection with the approval of each Agreement,
the Trustees reviewed a significant amount of a wide variety of information that
they had requested and received from the Manager and the Subadvisor, and data
and analysis from an outside data provider and a third party consultant. The
Trustees considered various industry trends and regulatory developments in their
deliberations. In considering approval of each Agreement, and in evaluating the
fairness of the compensation to be paid by the Fund, the Trustees met both as a
full Board and in executive session with no Interested Trustee present, in
advance of the meeting at which the Agreements were approved, and they
considered a number of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and the Subadvisor have provided historically to the Fund, and
also generally to other series of the Trust. Among other services, the Manager's
services have included investment management services, including monitoring and
evaluating the Subadvisor's investment program and investment results with
respect to the Fund, and the Subadvisor's compliance with the Fund's investment
policies and restrictions, and administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets,
and its other services include, among other services, providing reports to the
Manager and reviewing certain aspects of Fund filings. The Trustees considered,
among other things, the Manager's and Subadvisor's management, personnel,
resources, operations and portfolio management capabilities. The Board reviewed
reports on the Subadvisor's brokerage practices, including with respect to best
execution of portfolio trades. The Trustees considered the Manager's supervision
of the Fund's service providers and its attention to the compliance program of
the Trust, the Manager, the Subadvisor and certain other service providers, as
well as the Subadvisor's attention to its compliance program. The Trustees noted
the generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's recent investment
performance that was better than peer median and its slightly lagging
performance over longer time periods.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information that indicated that the profitability to the Manager and its
affiliates from the Management Agreement, and from the overall relationship with
the Trust, was low. The Trustees considered other benefits that the Manager and
its affiliates receive from the relationship with the Trust, including benefits
that NYLIFE Distributors and MainStay Shareholder Services receive in exchange
for services they provide to the Funds, and certain benefits from soft dollar
arrangements. The Trustees acknowledged certain benefits to the reputation of
the Manager and the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They considered that, across the Trust
(though not every series or share class), gross transfer agency fees tended to
be relatively high and, therefore, adversely affected gross expense ratios.
Noting that the Trust historically permitted smaller investor accounts, the
Trustees considered measures that had been recently implemented that were
intended to increase the average size of shareholder accounts, including
generally higher investment minimums, and small account fees, and the Trustees
considered potential benefits to the Manager and its affiliates arising from
such measures.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the
www.mainstayfunds.com 27
Fund's assets, or the assets of the Trust overall, increase. The Trustees noted,
in particular, the plans of the Manager and its affiliates for marketing and
distributing the shares of the various series of the Trust. They noted the
Manager's willingness to implement a contractual breakpoint that would reduce
the Fund's management fee at asset levels above the breakpoint, and the fact
that the breakpoint was intended to provide that shareholders would share in
benefits from economies of scale obtained through the growth in the Fund's
assets. The Trustees noted that the Fund's assets had decreased in recent years
and had not yet reached the level at which the breakpoint would reduce the
Fund's management fee rate. The Trustees reviewed information about the
potential effect of asset growth on Fund expenses, the difficulty of forecasting
its effect on the profitability of the Manager and its affiliates, and the
management fee breakpoints applicable to the Fund and certain other funds. It
was noted that, to the extent the Fund's gross expenses currently were higher
than its net expenses, the reduction of the Fund's gross expenses through the
achievement of economies of scale might benefit the Manager by reducing the
expenses the Manager must reimburse to the Fund rather than directly benefiting
the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by the
Fund, the Trustees evaluated factors such as the fees and expenses borne by
other registered funds in the market pursuing strategies generally similar to
the Fund's. The Trustees considered certain comparative data with respect to
other registered fund clients of the Manager and Subadvisor having investment
strategies similar to that of the Fund, and took account of explanations and
other information relating to the fees and expenses of those other funds and
accounts. The Trustees considered the current and proposed contractual and net
management fees, its anticipated gross and net expense ratio, and various
components of the expense ratio, in comparison to other funds in comparison
groupings. The Trustees generally acknowledged the historical relationships
among the Manager, the Subadvisor and the Trust and the likely difficulties in
implementing an alternative to the investment management arrangement between the
Trust and the Manager. The Trustees noted the Manager's agreement to continue to
waive a certain portion of its management fee and maintain the existing
contractual limitation on the Fund's net expenses.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings, with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. This summary set out
above describes the most important, but not all, of the factors considered by
the Trustees in considering each Agreement. On the basis of their review, a
majority of the Trustees and a majority of the Non-Interested Trustees concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the judgment of a
majority of the Trustees and a majority of the Non-Interested Trustees that
approval of each Agreement was in the best interests of the Fund and its
shareholders.
28 MainStay Government Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
For State individual income tax purposes, the Fund hereby designates 17.5% of
the ordinary income dividends paid during its fiscal year ended October 31, 2007
as attributable to interest income from Direct Obligations of the United States.
Such dividends may be exempt from individual income tax purposes in most states
including New York, California and the District of Columbia. Consult your tax
advisor for further details.
The dividends paid by the Fund during the fiscal year ended October 31, 2007,
should be multiplied by 98.7% to arrive at the amount eligible for qualified
interest income.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
or (iii) on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 1-800-MAINSTAY (1-800-624-6782). You also can obtain and review copies
of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC
(information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330).
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of The MainStay Funds (the
"Trust") was held on May 4, 2007, at the offices of New York Life Investment
Management LLC in Parsippany, New Jersey. The purpose of the meeting was to
elect the following individuals to the Board of Trustees of the Trust:
- Susan B. Kerley
- Alan R. Latshaw
- Peter Meenan
- Richard H. Nolan, Jr.
- Richard S. Trutanic
- Roman L. Weil
- John A. Weisser
- Brian A. Murdock (Interested Trustee)
There are no other Trustees of the Trust.
No other business came before the special meeting. The proposal to elect
Trustees was passed by the shareholders of the Fund as shown below:
<Table>
<Caption>
GOVERNMENT VOTES VOTES
FUND FOR WITHHELD ABSTENTIONS TOTAL
Susan B. Kerley 11,737,180.698 162,808.171 7,893.000 11,907,881.869
- --------------------------------------------------------------------------------------
Alan R. Latshaw 11,742,029.979 157,958.890 7,893.000 11,907,881.869
- --------------------------------------------------------------------------------------
Peter Meenan 11,745,047.716 154,941.153 7,893.000 11,907,881.869
- --------------------------------------------------------------------------------------
Richard H. Nolan, Jr. 11,744,698.324 155,290.545 7,893.000 11,907,881.869
- --------------------------------------------------------------------------------------
Richard S. Trutanic 11,746,002.131 153,986.738 7,893.000 11,907,881.869
- --------------------------------------------------------------------------------------
Roman L. Weil 11,744,264.615 155,724.254 7,893.000 11,907,881.869
- --------------------------------------------------------------------------------------
John A. Weisser 11,745,995.426 153,993.443 7,893.000 11,907,881.869
- --------------------------------------------------------------------------------------
Brian A. Murdock 11,745,405.476 154,583.393 7,893.000 11,907,881.869
- --------------------------------------------------------------------------------------
</Table>
This resulted in approval of the proposal.
www.mainstayfunds.com 29
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Pursuant to
notice, a Special Meeting of Shareholders of the Trust was held on May 4, 2007,
at NYLIM's offices in Parsippany, New Jersey. The Trustees listed below were
elected to serve the Trust effective June 7, 2007.
Each Trustee serves until his or her successor is elected and qualified or until
his or her resignation, death or removal. The Retirement Policy provides that a
Trustee shall tender his or her resignation upon reaching age 72. A Trustee
reaching the age of 72 may continue for additional one-year periods with the
approval of the Board's Nominating and Governance Committee, except that no
Trustee shall serve on the Board past his or her 75th birthday. Officers serve a
term of one year and are elected annually by the Trustees. The business address
of each Trustee and officer listed below is 51 Madison Avenue, New York, New
York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF FUNDS
POSITION(S) HELD IN FUND COMPLEX
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
BRIAN A. MURDOCK Indefinite; Member of the Board of Managers 73 Trustee, Eclipse Funds since
3/14/56 Trustee and Chief and President (since 2004) and June, 2007 (3 funds); Director,
Executive Officer Chief Executive Officer (since Eclipse Funds Inc. since June
since 2006 2006), New York Life Investment 2007 (22 funds); Director,
Management LLC and New York MainStay VP Series Fund, Inc.,
Life Investment Management since 2006 (24 portfolios);
Holdings LLC; Senior Vice Director, ICAP Funds, Inc.,
President, New York Life since 2006 (3 funds)
Insurance Company (since 2004);
Chairman of the Board and
President, NYLIFE Distributors
LLC (since 2004); Member of the
Board of Managers, NYLCAP
Manager LLC and Madison Capital
Funding LLC (since 2004),
MacKay Shields LLC and
Institutional Capital LLC
(since 2006), and McMorgan &
Company LLC (since 2007); Chief
Executive Officer, Eclipse
Funds and Eclipse Funds Inc.
(since 2006); Chairman (2006 to
2007) and Director and Chief
Executive Officer (since 2006),
MainStay VP Series Fund, Inc.;
Director and Chief Executive
Officer, ICAP Funds, Inc.
(since 2006); Chief Investment
Officer, MLIM Europe and Asia
(2001 to 2003); President of
Merrill Japan and Chairman of
MLIM's Pacific Region (1999 to
2001)
-----------------------------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow Capital
Management, Inc., McMorgan & Company LLC, NYLIFE Securities Inc. and/or NYLIFE
Distributors LLC, as described in detail above in the column "Principal
Occupation(s) During Past Five Years."
30 MainStay Government Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. KERLEY Indefinite; Partner, Strategic Management 73 Chairman since 2005 and Trustee
8/12/51 Chairman and Advisors LLC (since 1990) since 2000, Eclipse Funds (3
Trustee since funds); Chairman since 2005 and
June 2007 Director since 1990, Eclipse
Funds Inc. (22 funds); Chairman
and Director, ICAP Funds, Inc.,
since 2006 (3 funds); Chairman
and Director, MainStay VP
Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
Legg Mason Partners Funds,
Inc., since 1991 (30
portfolios)
----------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & Young 73 Trustee, Eclipse Funds since
3/27/51 Trustee and Audit LLP (2002 to 2003); Partner, June 2007 (3 funds); Director,
Committee Arthur Andersen LLP (1989 to Eclipse Funds Inc. since June
Financial Expert 2002); Consultant to the Audit 2007 (22 funds); Director, ICAP
since 2006 and Compliance Committee of The Funds, Inc., since June 2007 (3
MainStay Funds (2004 to 2006) funds); Director, MainStay VP
Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
State Farm Associates Funds
Trusts since 2005 (3
portfolios); Trustee, State
Farm Mutual Fund Trust since
2005 (15 portfolios); Trustee,
State Farm Variable Product
Trust since 2005 (9 portfolios)
----------------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds since
12/5/41 Trustee since President and Chief Executive 2002 (3 funds); Director,
June 2007 Officer, Babson-United, Inc. Eclipse Funds Inc. since 2002
(financial services firm) (2000 (22 funds); Director, ICAP
to 2004); Independent Funds, Inc.,
Consultant (1999 to 2000); Head since 2006 (3 funds); Director,
of Global Funds, Citicorp (1995 MainStay VP Series Fund, Inc.,
to 1999) since June 2007 (24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 73 Trustee, Eclipse Funds since
NOLAN, JR. Trustee since Management; President--Shields/ June 2007 (3 funds); Director,
11/16/46 June 2007 Alliance, Alliance Capital Eclipse Funds Inc. since June
Management (1994 to 2004) 2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 2006
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman (since 1990) and Chief 73 Trustee, Eclipse Funds since
TRUTANIC Trustee since Executive Officer (1990 to June 2007 (3 funds); Director,
2/13/52 1994 1999), Somerset Group Eclipse Funds Inc. since June
(financial advisory firm); 2007 (22 funds); Director, ICAP
Managing Director and Advisor, Funds, Inc., since June 2007 (3
The Carlyle Group (private funds); Director, MainStay VP
investment firm) (2002 to Series Fund, Inc., since June
2004); Senior Managing Director 2007 (24 portfolios)
and Partner, Groupe Arnault
S.A. (private investment firm)
(1999 to 2002)
----------------------------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 31
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEE
ROMAN L. WEIL Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds since
5/22/40 Trustee and Audit Accounting, Graduate School of June 2007 (3 funds); Director,
Committee Business, University of Eclipse Funds Inc. since June
Financial Expert Chicago; President, Roman L. 2007 (22 funds); Director, ICAP
since June 2007 Weil Associates, Inc. Funds, Inc., since June 2007 (3
(consulting firm) funds); Director, MainStay VP
Series Fund, Inc., since 1994
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 73 Trustee, Eclipse Funds since
10/22/41 Trustee since Salomon Brothers, Inc. (1971 to June 2007 (3 funds); Director,
June 2007 1995) Eclipse Funds Inc. since June
2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 1997
(24 portfolios); Trustee,
Direxion Funds (69 funds) and
Direxion Insurance Trust (45
funds) since March 2007
----------------------------------------------------------------------------------------------------------------------
</Table>
Terry L. Lierman resigned as Trustee of the Trust effective May 31, 2007. Edward
J. Hogan, John B. McGuckian and Donald E. Nickelson resigned as Trustees of the
Trust effective June 7, 2007.
At a meeting of the Board of Trustees held on June 7 and 8, 2007, the following
individuals were appointed to serve as Officers of the Trust effective June 7,
2007:
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ROBERT A. Chief Legal Senior Managing Director, General Counsel and Secretary, New
ANSELMI Officer since York Life Investment Management LLC (including predecessor
10/19/46 2004 advisory organizations) (since 2000); Secretary (since 2001)
and General Counsel (since 2004), New York Life Investment
Management Holdings LLC; Senior Vice President, New York
Life Insurance Company (since 2000); Vice President and
Secretary, McMorgan & Company LLC (since 2001); Secretary,
NYLIM Service Company LLC (since 2005), NYLCAP Manager LLC
(since 2004), Madison Capital Funding LLC (since 2002), and
Institutional Capital LLC (since 2006); Chief Legal Officer,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), McMorgan Funds (since 2005) and
ICAP Funds, Inc. (since 2006); Managing Director and Senior
Counsel, Lehman Brothers Inc. (1998 to 1999); General
Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998)
-------------------------------------------------------------------------------------------------
JACK R. Treasurer and Managing Director, New York Life Investment Management LLC
BENINTENDE Principal (since June 2007); Treasurer and Principal Financial and
5/12/64 Financial and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
Accounting MainStay VP Series Fund, Inc., and ICAP Funds, Inc. (since
Officer since June 2007); Vice President, Prudential Investments (2000 to
June 2007 2007); Assistant Treasurer, JennisonDryden Family of Funds,
Target Portfolio Trust, The Prudential Series Fund and
American Skandia Trust (2006 to 2007); Treasurer and
Principal Financial Officer, The Greater China Fund (2007)
-------------------------------------------------------------------------------------------------
STEPHEN P. President since Senior Managing Director and Chief Marketing Officer, New
FISHER March 2007 York Life Investment Management LLC (since 2005); Managing
2/22/59 Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since March 2007); Managing Director, UBS
Global Asset Management (1999 to 2003)
-------------------------------------------------------------------------------------------------
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration predecessor advisory organizations) (since 2000); Executive
2/8/59 since 2005 Vice President, New York Life Trust Company (since 2006);
Vice President--Administration, Eclipse Funds, Eclipse Funds
Inc. and MainStay VP Series Fund, Inc. (since 2005) and ICAP
Funds, Inc. (since 2006)
-------------------------------------------------------------------------------------------------
</Table>
32 MainStay Government Fund
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Senior Managing Director and Chief Compliance Officer (since
MICUCCI President and 2006) and Managing Director and Chief Compliance Officer
12/16/65 Chief Compliance (2003 to 2006), New York Life Investment Management LLC and
Officer since New York Life Investment Management Holdings LLC; Senior
2006 Managing Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE Distributors
LLC; Chief Compliance Officer, NYLCAP Manager LLC (since
2006); Senior Vice President and Chief Compliance Officer,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund,
Inc., and ICAP Funds, Inc. (since 2006); Vice President--
Compliance, Eclipse Funds, Eclipse Funds Inc. and MainStay
VP Series Fund, Inc. (2004 to 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002)
-------------------------------------------------------------------------------------------------
MARGUERITE E.H. Secretary since Managing Director and Associate General Counsel, New York
MORRISON* 2004 Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC (since
2005); Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP Funds,
Inc. (since 2006); Chief Legal Officer--Mutual Funds and
Vice President and Corporate Counsel, The Prudential
Insurance Company of America (2000 to 2004)
-------------------------------------------------------------------------------------------------
</Table>
* In addition to serving as Secretary to the Trust, effective January 1, 2008,
Marguerite E.H. Morrison will assume the role of Chief Legal Officer to the
Trust.
Arphiela Arizmendi resigned as Treasurer and Principal Financial and Accounting
Officer of the Trust effective June 7, 2007.
Christopher O. Blunt resigned as President of the Trust effective March 12,
2007.
Alan J. Kirshenbaum resigned as Senior Vice President of the Trust effective
March 19, 2007.
www.mainstayfunds.com 33
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay 130/30 Core Fund
MainStay 130/30 Growth Fund
MainStay All Cap Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay 130/30 High Yield Fund(2)
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Institutional Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Principal Preservation Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay 130/30 International Fund
MainStay Global High Income Fund
MainStay ICAP International Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
RETIREMENT FUNDS
MainStay Retirement 2010 Fund
MainStay Retirement 2020 Fund
MainStay Retirement 2030 Fund
MainStay Retirement 2040 Fund
MainStay Retirement 2050 Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
New York, New York
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
Chicago, Illinois
MACKAY SHIELDS LLC(3)
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
MCMORGAN & COMPANY LLC(3)
San Francisco, California
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
[True Blank Page]
(NEW YORK LIFE INVESTMENT MANAGEMENT LLC LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2007 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A011872 (RECYCLE LOGO) MS329-07 MSG11-12/-07
07
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
HIGH YIELD CORPORATE BOND FUND
Message from the President
and
Annual Report
October 31, 2007
MESSAGE FROM
THE PRESIDENT
The 12-month period ended October 31, 2007, was a dynamic one for mutual fund
investors. U.S. equity markets generally advanced, with growth stocks out-
performing value stocks at all capitalization levels. Although past performance
is no guarantee of future results, international stocks as a whole provided even
stronger returns for U.S. investors.
The progress of the equity markets, however, was far from steady. In February,
weakness in Asian markets led to sharp price declines around the globe. The
correction caused many investors to reconsider whether China and other emerging
economies could sustain their rapid growth. Fortunately, strong
corporate-earnings reports and positive economic news helped the stock market
regain its footing.
In July and August, difficulties in the subprime-mortgage market led to another
stock-market correction. A number of high-profile mortgage originators either
closed their doors or were sold to larger entities. Other leading financial
services firms faced major write-offs because of subprime-mortgage exposure.
The Federal Open Market Committee (FOMC) took prompt action to increase
liquidity and stabilize the financial markets by lowering the discount rate and
the federal funds target rate during the reporting period. These Federal Reserve
moves helped calm investor concerns, and the stock market generally advanced
from August 16, 2007, the date of an unscheduled FOMC meeting, through the end
of October 2007.
Difficulties in the subprime-mortgage market led to a "flight to quality," or a
general movement toward fixed-income securities that carry lower risk. As demand
for short- and intermediate-term Treasury securities increased, yields fell
across much of the maturity spectrum. Yields rose, however, on 20-and 30-year
Treasury bonds, and the yield curve steepened during the 12-month reporting
period.
High-yield bonds rallied from November 2006 through May 2007. But in June and
July, the yield differences--or spreads--between high-yield bonds and comparable
Treasury securities began to widen. At the end of October 2007, these spreads
were wider than when the reporting period began, making high-yield securities
more attractive to investors willing to accept higher risk.
To help investors address the challenges of today's ever-changing markets, New
York Life Investment Management LLC provides access to seven institutional
investment boutiques, each with its own proprietary research and investment
culture. As advisors and subadvisors to MainStay Funds, these boutiques bring a
wealth of experience and market insight to our shareholders. The portfolio
managers of each MainStay Fund seek to consistently apply time-tested investment
principles across a wide variety of market environments.
The report that follows provides more specific information about the market
forces and investment decisions that affected your investment in MainStay Funds
from November 1, 2006, through October 31, 2007. Please read the report
carefully. As you do, bear in mind that this annual report reflects just a short
segment of your lifetime investment journey. We look forward to continuing to
work with you, wherever that journey may lead.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
HIGH YIELD CORPORATE BOND FUND
MainStay Funds
Annual Report
October 31, 2007
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 10
- --------------------------------------------------------------------------------
Financial Statements 21
- --------------------------------------------------------------------------------
Notes to Financial Statements 26
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 34
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 35
- --------------------------------------------------------------------------------
Federal Income Tax Information 37
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 37
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 37
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 37
- --------------------------------------------------------------------------------
Trustees and Officers 38
</Table>
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT
MONTH-END PERFORMANCE INFORMATION, PLEASE CALL 1-800-MAINSTAY (1-800-624-6782)
OR VISIT WWW.MAINSTAYFUNDS.COM.
A 2% REDEMPTION FEE WILL BE IMPOSED ON REDEMPTIONS MADE WITHIN 60 DAYS OF
PURCHASE. PERFORMANCE DATA SHOWN DOES NOT REFLECT THIS FEE, WHICH WOULD LOWER
PERFORMANCE.
CLASS A SHARES--MAXIMUM 4.5% INITIAL SALES CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
With sales charges 2.58% 14.00% 6.57%
Excluding sales charges 7.41 15.05 7.06
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY HIGH YIELD CORPORATE
BOND FUND - CLASS A CREDIT SUISSE HIGH YIELD INDEX
----------------------------- ------------------------------
10/31/97 9550 10000
9220 9751
10406 10291
10526 10212
9969 10250
9374 10243
13477 13466
15166 15211
16055 15749
17593 17369
10/31/07 18897 18706
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
With sales charges 1.46% 13.91% 6.26%
Excluding sales charges 6.46 14.15 6.26
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY HIGH YIELD CORPORATE
BOND FUND - CLASS B CREDIT SUISSE HIGH YIELD INDEX
----------------------------- ------------------------------
10/31/97 10000 10000
9580 9751
10737 10291
10774 10212
10121 10250
9467 10243
13493 13466
15065 15211
15823 15749
17234 17369
10/31/07 18348 18706
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
With sales charges 5.63% 14.18% 6.27%
Excluding sales charges 6.63 14.18 6.27
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY HIGH YIELD CORPORATE
BOND FUND - CLASS C CREDIT SUISSE HIGH YIELD INDEX
----------------------------- ------------------------------
10/31/97 10000 10000
9580 9751
10737 10291
10774 10212
10121 10250
9467 10243
13493 13466
15065 15211
15823 15749
17234 17369
10/31/07 18376 18706
</Table>
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect maximum applicable sales charges explained in this paragraph, change in
share price, and reinvestment of dividend and capital-gain distributions. The
graphs assume an initial investment of $10,000 and reflect the deduction of all
sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 4.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase and have an annual 12b-1 fee of 1.00%.
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee and are generally available to corporate and institutional investors
with a minimum initial investment of $5 million. Prior to 9/1/98 (for Class C
shares) and 12/31/03 (for Class I shares), performance for Class C and Class I
shares includes the historical performance of Class B shares adjusted to reflect
the applicable sales charge (or CDSC), fees, estimated expenses and fee
waivers/expense limitations of Class C and Class I shares upon initial offer.
Unadjusted, the performance shown for the newer classes of shares might have
been lower.
THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS AND
SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
CLASS I SHARES--NO SALES CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -------------------------------------
7.49% 15.32% 7.31%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY HIGH YIELD CORPORATE
BOND FUND - CLASS I CREDIT SUISSE HIGH YIELD INDEX
----------------------------- ------------------------------
10/31/97 10000 10000
9666 9751
10940 10291
11092 10212
10519 10250
9926 10243
14303 13466
16130 15211
17117 15749
18833 17369
10/31/07 20244 18706
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- -------------------------------------------------------------------------------
Credit Suisse High Yield Index(1) 7.70% 12.80% 6.46%
Average Lipper high current yield fund(2) 6.21 11.33 4.39
</Table>
1. The Credit Suisse High Yield Index is an unmanaged, market-weighted index
that consists of publicly traded bonds rated below BBB by Standard & Poor's
and below Baa by Moody's. Results assume reinvestment of all income and
capital gains. The Credit Suisse High Yield Index is considered to be the
Fund's broad-based securities-market index for comparison purposes. An
investment cannot be made directly in an index.
2. Lipper Inc. is an independent monitor of fund performance. Results are based
on total returns with all dividend and capital-gain distributions reinvested.
THE DISCLOSURE ON THE PRECEDING PAGE IS AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay High Yield Corporate Bond Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY HIGH YIELD CORPORATE BOND
FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2007, to October 31, 2007,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1,
2007, to October 31, 2007.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six-months ended October 31, 2007. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/07 10/31/07 PERIOD(1) 10/31/07 PERIOD(1)
CLASS A SHARES $1,000.00 $1,003.60 $5.25 $1,019.80 $5.29
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $ 999.75 $9.02 $1,016.05 $9.10
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $ 999.75 $9.02 $1,016.05 $9.10
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,002.85 $3.99 $1,021.50 $4.02
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's net annualized expense ratio of each class
(1.04% for Class A, 1.79% for Class B and Class C, and 0.79% for Class I)
multiplied by the average account value over the period, divided by 365 and
multiplied by 184 (to reflect the one-half year period).
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2007
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Corporate Bonds 64.4
Short-Term Investments (collateral from securities lending 10.9
is 2.7%)
Loan Assignments & Participations 9.0
Foreign Bonds 8.5
Common Stocks 3.3
Convertible Bonds 1.3
Preferred Stocks 1.2
Yankee Bonds 0.8
Convertible Preferred Stocks 0.6
Asset-Backed Securities 0.3
Warrants 0.0*
Liabilities in Excess of Cash and Other Assets (0.3)
</Table>
* Less than one-tenth of a percent.
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2007 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Calpine Corp., 8.50%, due 7/15/10
2. General Motors Acceptance Corp. LLC,
6.75%, due 12/1/14
3. INVISTA, 9.25%, due 5/1/12
4. Northwest Airlines, Inc.
5. Goodyear Tire & Rubber Co. (The),
11.25%, due 3/1/11
6. Sovereign Real Estate Investment Corp., 12.00%
7. Lucent Technologies, Inc., 6.45%, due 3/15/29
8. NXP B.V./NXP Funding LLC, 7.875%, due 10/15/14
9. Chesapeake Energy Corp., 6.50%, due 8/15/17
10. HCA, Inc., Term Loan B, 7.448%, due 11/18/13
</Table>
8 MainStay High Yield Corporate Bond Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager J. Matthew Philo, CFA, of MacKay Shields
LLC
HOW DID MAINSTAY HIGH YIELD CORPORATE BOND FUND PERFORM RELATIVE TO ITS PEERS
AND ITS BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2007?
Excluding all sales charges, MainStay High Yield Corporate Bond Fund returned
7.41% for Class A shares, 6.46% for Class B shares and 6.63% for Class C shares
for the 12 months ended October 31, 2007. Over the same period, the Fund's Class
I shares returned 7.49%. All share classes outper-formed the 6.21% return of the
average Lipper(1) high current yield fund and underperformed the 7.70% return of
the Credit Suisse High Yield Index(2) for the 12 months ended October 31, 2007.
The Credit Suisse High Yield Index is the Fund's broad-based securities-market
index. See page 5 for Fund returns with sales charges.
WHAT FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING
PERIOD?
The Fund's performance relative to the Credit Suisse High Yield Index resulted
from our bottom-up investment style, which focused on individual companies to
determine risk-group weightings in the context of historical yield spreads.(3)
Throughout the reporting period, the Fund was underweight higher-risk bonds
because we felt that they provided insufficient compensation for the additional
risks the securities entailed. Our positioning detracted from relative results,
however, since the lowest-quality portion of the high-yield market outperformed
higher-quality high-yield bonds.
High-yield bonds reflect risks and rewards that are similar to those of
equities. As a result, traditional fixed-income strategies such as yield-curve
positioning, maturity structure and duration management are not the focal point
of our investment process.
While high-yield corporate bond holdings constitute the majority of the Fund's
holdings, the Fund usually maintains a modest weighting in common equities.
Although volatile, the trend for U.S. stocks was generally higher during the
12-month reporting period.
HOW DID YOU POSITION THE FUND FROM AN INDUSTRY PERSPECTIVE?
During the reporting period, we added to the Fund's exposure in health care and
energy. In the energy sector, the electric utility industry was among the larger
weightings in the Fund. During the reporting period, subprime-mortgage problems
spilled into other credit markets and the high-yield market in particular. By
the end of October, spreads were wider than at the beginning of the reporting
period, and relative values had improved. Late in the report-ing period, we
reduced the Fund's overall cash posi-tion to take advantage of wider spreads.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
We added to or established meaningful positions in the fixed-income securities
of Community Health Systems, Reliant Energy and TXU Electric Delivery. We
reduced or eliminated significant positions in the fixed-income securities of
Chiquita Brands International, GMAC and Jean Coutu Group.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
The Fund's weightings are a result of our bottom-up securities selection
process. As of October 31, 2007, the Fund was overweight relative to the Credit
Suisse High Yield Index in health care and energy and underweight in consumer
discretionary, including home builders and retailers.
High-yield securities ("junk bonds") are generally considered speculative
because they present a greater risk of loss than higher- quality debt securities
and may be subject to greater price volatility. Foreign securities may be
subject to greater risks than U.S. investments, including currency fluctuations,
less-liquid trading markets, greater price volatility, political and economic
instability, less publicly available information, and changes in tax or currency
laws or monetary policy. These risks are likely to be greater in emerging
markets than in developed markets. The Fund may experience a portfolio turnover
rate of more than 100% and may generate taxable short-term capital gains. Funds
that invest in bonds are subject to credit, inflation and interest-rate risk and
can lose principal value when interest rates rise.
1. See footnote on page 6 for more information on Lipper Inc.
2. See footnote on page 6 for more information on the Credit Suisse High Yield
Index.
3. The terms "spread" and "yield spread" may refer to the difference in yield
between a security or type of security and comparable U.S. Treasury issues.
The term may also refer to the difference in yield between two specific
securities or types of securities at a given time.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecast made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (84.3%)+
ASSET-BACKED SECURITIES (0.3%)
- ---------------------------------------------------------------------------------
AIRLINES (0.2%)
Northwest Airlines, Inc.
Series 2001-1, Class 1B
7.691%, due 4/1/17 $ 4,046,044 $ 3,965,124
Series 2002-1, Class IC2
9.055%, due 5/20/12 5,573,124 5,768,183
--------------
9,733,307
--------------
ENTERTAINMENT (0.1%)
United Artists Theatre Circuit, Inc.
Series 1995-A
9.30%, due 7/1/15 (a)(b) 1,977,711 1,779,940
--------------
Total Asset-Backed Securities
(Cost $11,512,858) 11,513,247
--------------
CONVERTIBLE BONDS (1.3%)
- ---------------------------------------------------------------------------------
INSURANCE (0.1%)
Conseco, Inc.
3.50%, due 9/30/35
(zero coupon), beginning
9/30/10 (c)(d) 2,940,000 2,712,150
--------------
INTERNET (0.0%)++
At Home Corp.
4.75%, due 12/15/07 (a)(b)(e)(l) 61,533,853 6,153
--------------
MEDIA (0.4%)
Sinclair Broadcast Group, Inc.
3.00%, due 5/15/27 17,060,000 16,121,700
--------------
TELECOMMUNICATIONS (0.8%)
CIENA Corp.
3.75%, due 2/1/08 26,630,000 26,563,425
Nortel Networks Corp.
4.25%, due 9/1/08 12,377,000 12,222,288
--------------
38,785,713
--------------
Total Convertible Bonds
(Cost $57,718,962) 57,625,716
--------------
CORPORATE BONDS (64.4%)
- ---------------------------------------------------------------------------------
ADVERTISING (0.5%)
R.H. Donnelley, Inc.
8.875%, due 10/15/17 (c) 11,210,000 11,210,000
Vertis, Inc.
9.75%, due 4/1/09 11,185,000 11,185,000
--------------
22,395,000
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
AEROSPACE & DEFENSE (0.6%)
Sequa Corp.
8.875%, due 4/1/08 $ 6,565,000 $ 6,638,856
9.00%, due 8/1/09 21,540,000 23,101,650
--------------
29,740,506
--------------
AGRICULTURE (1.1%)
Dayton Superior Corp.
10.75%, due 9/15/08 15,530,000 15,724,125
Panolam Industries International, Inc.
10.75%, due 10/1/13 (c)(d) 11,300,000 10,735,000
Reynolds American, Inc.
7.625%, due 6/1/16 12,970,000 14,032,463
7.75%, due 6/1/18 10,705,000 11,614,443
--------------
52,106,031
--------------
AIRLINES (0.6%)
DAE Aviation Holdings, Inc.
11.25%, due 8/1/15 (c) 16,890,000 17,734,500
Delta Air Lines, Inc.
(zero coupon), due 12/27/07 (e) 5,175,000 329,906
2.875%, due 2/6/24 (e) 7,201,000 468,065
2.875%, due 2/18/24 (c)(e) 4,190,000 272,350
8.00%, due 6/3/23 (e) 24,034,000 1,593,455
8.30%, due 12/15/29 (e) 11,297,000 748,426
9.25%, due 3/15/22 (e) 9,000,000 573,750
9.75%, due 5/15/21 (e) 2,115,000 140,119
10.00%, due 8/15/08 (e) 8,195,000 522,431
10.375%, due 2/1/11 (e) 6,515,000 415,331
10.375%, due 12/15/22 (e) 15,160,000 966,450
Northwest Airlines, Inc.
7.625%, due 11/15/23 (e) 11,810,900 576,372
7.875%, due 3/15/08 (e) 8,723,000 370,728
8.70%, due 3/15/08 (e) 445,000 18,913
8.875%, due 6/1/08 (e) 5,229,300 228,782
9.875%, due 3/15/08 (e) 18,534,200 834,039
10.00%, due 2/1/09 (e) 14,683,200 624,036
--------------
26,417,653
--------------
APPAREL (0.5%)
Quiksilver, Inc.
6.875%, due 4/15/15 4,390,000 4,093,675
Unifi, Inc.
11.50%, due 5/15/14 18,260,000 17,210,050
--------------
21,303,725
--------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
10 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
AUTO PARTS & EQUIPMENT (2.8%)
American Tire Distributors, Inc.
10.75%, due 4/1/13 (d) $ 5,980,000 $ 6,069,700
11.481%, due 4/1/12 (f) 4,085,000 4,125,850
FleetPride Corp.
11.50%, due 10/1/14 (c) 17,535,000 17,535,000
Goodyear Tire & Rubber Co. (The)
6.375%, due 3/15/08 5,845,000 5,786,550
8.625%, due 12/1/11 3,583,000 3,815,895
V 11.25%, due 3/1/11 40,235,000 43,051,450
Lear Corp.
Series B
8.50%, due 12/1/13 8,480,000 8,257,400
8.75%, due 12/1/16 14,090,000 13,526,400
Tenneco Automotive, Inc.
8.625%, due 11/15/14 (d) 14,555,000 14,846,100
10.25%, due 7/15/13 10,550,000 11,380,813
--------------
128,395,158
--------------
BEVERAGES (0.3%)
Constellation Brands, Inc.
7.25%, due 5/15/17 (c) 13,065,000 13,032,338
--------------
BUILDING MATERIALS (0.1%)
Compression Polymers Corp.
10.50%, due 7/1/13 5,660,000 5,660,000
--------------
CHEMICALS (1.6%)
Equistar Chemicals, L.P.
7.55%, due 2/15/26 11,985,000 10,606,725
10.125%, due 9/1/08 6,371,000 6,578,058
10.625%, due 5/1/11 10,141,000 10,597,345
MacDermid, Inc.
9.50%, due 4/15/17 (c) 10,300,000 9,836,500
Millennium America, Inc.
7.625%, due 11/15/26 8,115,000 6,978,900
Mosaic Global Holdings, Inc.
7.375%, due 12/1/14 (c) 3,900,000 4,124,250
7.625%, due 12/1/16 (c)(d) 5,090,000 5,484,475
Phibro Animal Health Corp.
10.00%, due 8/1/13 (c) 8,553,000 8,788,208
Reichhold Industries, Inc.
9.00%, due 8/15/14 (c) 1,355,000 1,375,325
Tronox Worldwide LLC/Tronox
Finance Corp.
9.50%, due 12/1/12 7,580,000 7,314,700
--------------
71,684,486
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
COAL (0.2%)
Peabody Energy Corp.
7.375%, due 11/1/16 $ 2,185,000 $ 2,272,400
7.875%, due 11/1/26 7,080,000 7,398,600
--------------
9,671,000
--------------
COMMERCIAL SERVICES (3.0%)
Cardtronics, Inc.
9.25%, due 8/15/13 16,120,000 15,555,800
9.25%, due 8/15/13 (c) 7,005,000 6,759,825
Great Lakes Dredge & Dock Corp.
7.75%, due 12/15/13 14,650,000 14,210,500
iPayment, Inc.
9.75%, due 5/15/14 16,404,000 15,747,840
Knowledge Learning Corp., Inc.
7.75%, due 2/1/15 (c) 24,640,000 24,085,600
Language Line, Inc.
11.125%, due 6/15/12 16,664,000 17,330,560
Neff Corp.
10.00%, due 6/1/15 (d) 5,540,000 3,988,800
Phoenix Color Corp.
13.00%, due 2/1/09 6,409,000 6,344,910
Protection One Alarm Monitoring, Inc.
Series B
8.125%, due 1/15/09 5,470,000 5,606,750
Rural/Metro Corp.
9.875%, due 3/15/15 12,020,000 11,614,325
Service Corp. International
7.375%, due 10/1/14 6,645,000 6,794,513
7.625%, due 10/1/18 6,850,000 7,021,250
--------------
135,060,673
--------------
COMPUTERS (0.7%)
SunGard Data Systems, Inc.
3.75%, due 1/15/09 660,000 643,500
4.875%, due 1/15/14 12,070,000 10,651,775
9.125%, due 8/15/13 19,335,000 19,721,700
--------------
31,016,975
--------------
DISTRIBUTION & WHOLESALE (0.5%)
Varietal Distribution Merger Sub, Inc.
10.25%, due 7/15/15 (c)(d)(g) 21,270,000 20,844,600
--------------
DIVERSIFIED FINANCIAL SERVICES (8.3%)
American Real Estate Partners, L.P./
American Real Estate Finance Corp.
7.125%, due 2/15/13 21,155,000 20,626,125
7.125%, due 2/15/13 (c) 18,680,000 18,213,000
8.125%, due 6/1/12 24,175,000 24,356,313
AmeriCredit Corp.
8.50%, due 7/1/15 (c)(d) 15,745,000 14,091,775
Cedar Brakes II LLC
9.875%, due 9/1/13 (c) 21,422,528 23,807,069
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (CONTINUED)
El Comandante Capital Corp.
(Escrow Shares)
11.75%, due 12/15/03 (a)(b)(h) $ 21,941,051 $ 1,579,756
Ford Motor Credit Co. LLC
7.375%, due 10/28/09 17,305,000 16,689,876
7.875%, due 6/15/10 2,410,000 2,323,322
General Motors Acceptance Corp. LLC
V 6.75%, due 12/1/14 54,965,000 48,704,157
8.00%, due 11/1/31 16,554,000 15,301,160
Hawker Beechcraft Acquisition Co. LLC/Hawker
Beechcraft Co.
8.50%, due 4/1/15 (c)(d) 8,405,000 8,552,088
9.75%, due 4/1/17 (c)(d) 5,430,000 5,525,025
Idearc, Inc.
8.00%, due 11/15/16 20,055,000 20,105,138
KAR Holdings, Inc.
8.75%, due 5/1/14 (c) 7,355,000 7,097,575
10.00%, due 5/1/15 (c) 12,520,000 11,956,600
LaBranche & Co., Inc.
9.50%, due 5/15/09 17,875,000 18,143,125
11.00%, due 5/15/12 18,075,000 17,894,250
MXEnergy Holdings, Inc.
12.813%, due 8/1/11 (f) 12,830,000 13,022,450
NSG Holdings LLC/NSG Holdings, Inc.
7.75%, due 12/15/25 (c) 4,360,000 4,316,400
Pinnacle Foods Finance LLC/Pinnacle
Foods Finance Corp.
9.25%, due 4/1/15 (c) 6,475,000 6,151,250
Rainbow National Services LLC
8.75%, due 9/1/12 (c) 10,205,000 10,613,200
10.375%, due 9/1/14 (c) 27,995,000 30,794,500
Regency Energy Partners/Regency
Energy Finance Corp.
8.375%, due 12/15/13 10,764,000 11,329,110
Ucar Finance, Inc.
10.25%, due 2/15/12 6,219,000 6,498,855
Vanguard Health Holding Co. II LLC
9.00%, due 10/1/14 20,220,000 19,714,500
--------------
377,406,619
--------------
ELECTRIC (4.3%)
AES Eastern Energy, L.P.
Series 1999-A
9.00%, due 1/2/17 16,550,061 17,915,441
Series 1999-B
9.67%, due 1/2/29 16,820,000 20,015,800
Calpine Corp.
V 8.50%, due 7/15/10 (c) 70,400,000 75,328,000
9.875%, due 12/1/11 (c) 10,730,000 11,212,850
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
ELECTRIC (CONTINUED)
Energy Future Holdings
10.875%, due 11/1/17 (c) $ 15,080,000 $ 15,249,650
NRG Energy, Inc.
7.25%, due 2/1/14 14,805,000 14,805,000
7.375%, due 2/1/16 1,090,000 1,087,275
PSE&G Energy Holdings LLC
8.625%, due 2/15/08 1,293,000 1,300,814
Reliant Energy Mid-Atlantic Power
Holdings LLC
Series C
9.681%, due 7/2/26 3,700,000 4,273,500
Reliant Energy, Inc.
7.625%, due 6/15/14 (d) 3,780,000 3,813,075
7.875%, due 6/15/17 (d) 30,195,000 30,459,206
Western Resources, Inc.
7.125%, due 8/1/09 50,000 50,857
--------------
195,511,468
--------------
ENERGY--ALTERNATE SOURCES (0.3%)
Salton Sea Funding Corp.
Series E
8.30%, due 5/30/11 (a) 19,188 20,928
VeraSun Energy Corp.
9.375%, due 6/1/17 (c) 14,375,000 11,823,438
--------------
11,844,366
--------------
ENTERTAINMENT (2.1%)
Gaylord Entertainment Co.
6.75%, due 11/15/14 13,826,000 13,411,220
8.00%, due 11/15/13 12,600,000 12,820,500
Jacobs Entertainment, Inc.
9.75%, due 6/15/14 15,590,000 15,745,900
Mohegan Tribal Gaming Authority
6.375%, due 7/15/09 8,108,000 8,026,920
6.875%, due 2/15/15 3,700,000 3,616,750
7.125%, due 8/15/14 1,050,000 1,029,000
8.00%, due 4/1/12 10,925,000 11,157,156
Penn National Gaming, Inc.
6.75%, due 3/1/15 18,440,000 18,901,000
6.875%, due 12/1/11 7,585,000 7,641,888
Shingle Springs Tribal Gaming Authority
9.375%, due 6/15/15 (c) 3,315,000 3,331,575
Speedway Motorsports, Inc.
6.75%, due 6/1/13 2,340,000 2,310,750
--------------
97,992,659
--------------
ENVIRONMENTAL CONTROL (0.5%)
Geo Sub Corp.
11.00%, due 5/15/12 21,865,000 22,411,625
--------------
</Table>
12 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
FOOD (1.0%)
Chiquita Brands International, Inc.
7.50%, due 11/1/14 $ 7,722,000 $ 6,718,140
Dole Food Co., Inc.
8.625%, due 5/1/09 6,400,000 6,432,000
Pilgrims Pride Corp.
7.625%, due 5/1/15 2,670,000 2,683,350
8.375%, due 5/1/17 (d) 4,375,000 4,407,813
Smithfield Foods, Inc.
7.75%, due 7/1/17 11,185,000 11,520,550
Stater Brothers Holdings
7.75%, due 4/15/15 13,600,000 13,566,000
--------------
45,327,853
--------------
FOREST PRODUCTS & PAPER (1.9%)
Bowater, Inc.
9.375%, due 12/15/21 21,466,000 17,924,110
9.50%, due 10/15/12 270,000 237,600
Georgia-Pacific Corp.
7.00%, due 1/15/15 (c) 5,760,000 5,644,800
7.125%, due 1/15/17 (c) 14,855,000 14,483,625
7.25%, due 6/1/28 2,370,000 2,180,400
7.75%, due 11/15/29 74,000 70,670
8.00%, due 1/15/24 15,193,000 14,965,105
8.875%, due 5/15/31 29,615,000 29,615,000
--------------
85,121,310
--------------
HAND & MACHINE TOOLS (0.4%)
Baldor Electric Co.
8.625%, due 2/15/17 9,015,000 9,398,138
Thermadyne Holdings Corp.
10.50%, due 2/1/14 (d) 7,325,000 7,178,500
--------------
16,576,638
--------------
HEALTH CARE-PRODUCTS (2.3%)
Cooper Cos., Inc. (The)
7.125%, due 2/15/15 9,235,000 9,142,650
Hanger Orthopedic Group, Inc.
10.25%, due 6/1/14 15,080,000 15,683,200
Invacare Corp.
9.75%, due 2/15/15 14,360,000 14,611,300
LVB Acquisition Merger
10.00%, due 10/15/17 (c) 14,520,000 14,919,300
10.375%, due 10/15/17 (c)(g) 6,560,000 6,642,000
11.625%, due 10/15/17 (c) 22,750,000 23,176,563
PTS Acquisition Corp.
9.50%, due 4/15/15 (c)(g) 19,235,000 18,561,775
Universal Hospital Services, Inc.
8.50%, due 6/1/15 (c)(g) 700,000 712,250
8.759%, due 6/1/15 (c)(f) 305,000 305,763
--------------
103,754,801
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
HEALTH CARE-SERVICES (1.5%)
Centene Corp.
7.25%, due 4/1/14 $ 6,047,000 $ 6,031,883
Community Health Systems, Inc.
8.875%, due 7/15/15 (c) 19,255,000 19,495,688
HCA, Inc.
6.75%, due 7/15/13 7,560,000 6,785,100
8.75%, due 9/1/10 3,280,000 3,337,400
9.25%, due 11/15/16 14,795,000 15,571,738
Psychiatric Solutions, Inc.
7.75%, due 7/15/15 12,445,000 12,662,788
Skilled Healthcare Group, Inc.
11.00%, due 1/15/14 5,899,000 6,415,163
--------------
70,299,760
--------------
HOLDING COMPANIES--DIVERSIFIED (0.5%)
ESI Tractebel Acquisition Corp.
Class B
7.99%, due 12/30/11 6,580,000 6,730,110
Leucadia National Corp.
8.125%, due 9/15/15 13,470,000 13,587,863
Susser Holdings LLC
10.625%, due 12/15/13 955,000 993,200
10.625%, due 12/15/13 (c) 2,241,000 2,330,640
--------------
23,641,813
--------------
HOUSEHOLD PRODUCTS & WARES (0.6%)
ACCO Brands Corp.
7.625%, due 8/15/15 19,250,000 18,287,471
Jarden Corp.
7.50%, due 5/1/17 9,910,000 9,414,500
--------------
27,701,971
--------------
HOUSEWARES (0.1%)
Libbey Glass, Inc.
12.385%, due 6/1/11 (f) 6,300,000 6,851,250
--------------
INSURANCE (1.6%)
Crum & Forster Holdings Corp.
7.75%, due 5/1/17 29,355,000 29,134,838
HUB International Holdings, Inc.
9.00%, due 12/15/14 (c) 27,840,000 26,726,400
Lumbermens Mutual Casualty
8.30%, due 12/1/37 (c)(e) 8,525,000 63,938
8.45%, due 12/1/97 (c)(e) 2,575,000 19,313
9.15%, due 7/1/26 (c)(e) 42,123,000 315,923
USI Holdings Corp.
9.433%, due 11/15/14 (c)(f) 6,375,000 5,928,750
9.75%, due 5/15/15 (c) 11,390,000 10,051,675
--------------
72,240,837
--------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
IRON & STEEL (0.3%)
Allegheny Ludlum Corp.
6.95%, due 12/15/25 $ 14,390,000 $ 14,749,750
Allegheny Technologies, Inc.
8.375%, due 12/15/11 210,000 223,650
--------------
14,973,400
--------------
LEISURE TIME (0.1%)
Town Sports International, Inc.
(zero coupon), due 2/1/14
11.00%, beginning 2/1/09 4,645,000 4,377,913
--------------
LODGING (2.2%)
Boyd Gaming Corp.
6.75%, due 4/15/14 8,220,000 8,065,875
7.125%, due 2/1/16 2,306,000 2,242,585
7.75%, due 12/15/12 14,200,000 14,626,000
Mandalay Resort Group
9.50%, due 8/1/08 8,670,000 8,886,750
MGM Mirage, Inc.
7.50%, due 6/1/16 14,445,000 14,354,719
MTR Gaming Group, Inc.
Series B
9.00%, due 6/1/12 11,155,000 11,155,000
9.75%, due 4/1/10 4,945,000 5,068,625
Park Place Entertainment Corp.
7.00%, due 4/15/13 13,406,000 14,009,270
7.50%, due 9/1/09 845,000 872,463
8.875%, due 9/15/08 1,730,000 1,753,788
San Pasqual Casino
8.00%, due 9/15/13 (c) 250,000 252,500
Seminole Hard Rock Entertainment, Inc./Seminole
Hard Rock International LLC
8.194%, due 3/15/14 (c)(f) 11,650,000 11,387,875
Wynn Las Vegas LLC
6.625%, due 12/1/14 7,805,000 7,668,413
--------------
100,343,863
--------------
MEDIA (2.2%)
Dex Media East LLC
12.125%, due 11/15/12 5,513,000 5,864,454
Houghton Mifflin Co.
7.20%, due 3/15/11 9,530,000 9,387,050
LBI Media, Inc.
8.50%, due 8/1/17 (c) 11,380,000 11,493,800
MediaNews Group, Inc.
6.875%, due 10/1/13 6,935,000 5,270,600
Morris Publishing Group LLC
7.00%, due 8/1/13 19,795,000 15,192,663
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MEDIA (CONTINUED)
Paxson Communications Corp.
8.493%, due 1/15/12 (c)(f) $ 16,465,000 $ 16,506,163
11.493%, due 1/15/13 (c)(f) 26,350,000 26,811,125
Ziff Davis Media, Inc.
11.356%, due 5/1/12 (f) 12,615,000 12,110,400
--------------
102,636,255
--------------
METAL FABRICATE & HARDWARE (0.7%)
Metals USA, Inc.
11.125%, due 12/1/15 6,580,000 7,024,150
Mueller Water Products, Inc.
7.375%, due 6/1/17 12,495,000 11,620,350
Neenah Foundary Co.
9.50%, due 1/1/17 16,650,000 15,318,000
--------------
33,962,500
--------------
MINING (0.6%)
Freeport-McMoRan Copper & Gold, Inc.
8.25%, due 4/1/15 7,125,000 7,695,000
8.375%, due 4/1/17 17,355,000 19,003,725
--------------
26,698,725
--------------
MISCELLANEOUS--MANUFACTURING (1.0%)
Actuant Corp.
6.875%, due 6/15/17 (c) 11,390,000 11,390,000
RBS Global, Inc./Rexnord Corp.
9.50%, due 8/1/14 25,630,000 26,462,975
Sally Holdings LLC
9.25%, due 11/15/14 (d) 7,550,000 7,587,750
--------------
45,440,725
--------------
OIL & GAS (5.3%)
Chaparral Energy, Inc.
8.50%, due 12/1/15 16,935,000 15,791,888
8.875%, due 2/1/17 (c) 19,885,000 18,592,475
Chesapeake Energy Corp.
V 6.50%, due 8/15/17 34,820,000 33,601,300
6.625%, due 1/15/16 7,560,000 7,408,800
6.875%, due 11/15/20 (d) 4,180,000 4,085,950
Energy Partners, Ltd.
10.368%, due 4/15/13 (c)(f) 12,130,000 12,220,975
Forest Oil Corp.
7.25%, due 6/15/19 (c) 4,000,000 4,000,000
8.00%, due 12/15/11 4,460,000 4,616,100
Hilcorp Energy I, L.P./Hilcorp Finance Co.
7.75%, due 11/1/15 (c) 11,605,000 11,416,419
9.00%, due 6/1/16 (c)(d) 9,005,000 9,342,688
Mariner Energy, Inc.
7.50%, due 4/15/13 17,985,000 17,490,413
Newfield Exploration Co.
6.625%, due 4/15/16 9,820,000 9,623,600
Parker Drilling Co.
9.625%, due 10/1/13 9,710,000 10,365,425
</Table>
14 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
OIL & GAS (CONTINUED)
Petroquest Energy, Inc.
10.375%, due 5/15/12 $ 14,675,000 $ 15,041,875
Pogo Producing Co.
6.875%, due 10/1/17 28,760,000 29,119,500
Stone Energy Corp.
6.75%, due 12/15/14 6,725,000 6,212,219
United Refining Co.
10.50%, due 8/15/12 7,175,000 7,417,156
Venoco, Inc.
8.75%, due 12/15/11 6,289,000 6,320,445
Whiting Petroleum Corp.
7.00%, due 2/1/14 14,185,000 13,954,494
7.25%, due 5/1/13 5,875,000 5,772,188
--------------
242,393,910
--------------
OIL & GAS SERVICES (0.8%)
Allis-Chalmers Energy, Inc.
8.50%, due 3/1/17 8,765,000 8,567,788
9.00%, due 1/15/14 14,270,000 14,448,375
Complete Production Services, Inc.
8.00%, due 12/15/16 11,850,000 11,494,500
--------------
34,510,663
--------------
PACKAGING & CONTAINERS (0.4%)
Owens-Brockway Glass Container, Inc.
8.25%, due 5/15/13 5,710,000 5,938,400
8.75%, due 11/15/12 10,250,000 10,698,438
8.875%, due 2/15/09 3,036,000 3,058,770
--------------
19,695,608
--------------
PIPELINES (1.9%)
ANR Pipeline Co.
7.375%, due 2/15/24 2,555,000 2,885,604
9.625%, due 11/1/21 19,281,000 26,238,800
El Paso Natural Gas Co.
7.50%, due 11/15/26 2,835,000 3,011,130
7.625%, due 8/1/10 8,175,000 8,423,348
8.375%, due 6/15/32 11,060,000 12,892,609
MarkWest Energy Partners, L.P./ MarkWest Energy
Finance Corp.
Series B
6.875%, due 11/1/14 5,525,000 5,165,875
8.50%, due 7/15/16 19,610,000 19,610,000
Southern Natural Gas Co.
7.35%, due 2/15/31 1,895,000 2,013,824
8.00%, due 3/1/32 1,420,000 1,619,612
Tennessee Gas Pipeline Co.
7.625%, due 4/1/37 3,265,000 3,570,738
--------------
85,431,540
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
REAL ESTATE (1.4%)
Chukchansi Economic Development Authority
8.00%, due 11/15/13 (c) $ 6,480,000 $ 6,528,600
Host Hotels & Resorts, L.P.
6.875%, due 11/1/14 6,500,000 6,548,750
Host Marriott, L.P.
Series Q
6.75%, due 6/1/16 12,020,000 12,020,000
Omega Healthcare Investors, Inc.
7.00%, due 4/1/14 19,305,000 19,449,788
Trustreet Properties, Inc.
7.50%, due 4/1/15 19,240,000 20,560,749
--------------
65,107,887
--------------
RETAIL (3.0%)
Burlington Coat Factory Warehouse Corp.
11.125%, due 4/15/14 (d) 7,545,000 6,865,950
Harry & David Holdings, Inc.
9.00%, due 3/1/13 8,265,000 7,913,738
Rite Aid Corp.
7.50%, due 1/15/15 (d) 19,465,000 18,491,750
7.50%, due 3/1/17 11,280,000 10,490,400
8.125%, due 5/1/10 495,000 498,094
8.625%, due 3/1/15 21,800,000 19,347,500
9.25%, due 6/1/13 1,450,000 1,366,625
9.375%, due 12/15/15 (c) 6,490,000 5,987,025
9.50%, due 6/15/17 (c) 7,115,000 6,581,375
Sbarro, Inc.
10.375%, due 2/1/15 (d) 15,160,000 13,700,850
Star Gas Partners, L.P./Star
Gas Finance Co.
Series B
10.25%, due 2/15/13 23,620,000 24,623,850
Toys "R" Us, Inc.
7.625%, due 8/1/11 22,695,000 20,312,025
--------------
136,179,182
--------------
SOFTWARE (0.6%)
Open Solutions, Inc.
9.75%, due 2/1/15 (c) 7,685,000 7,416,025
Serena Software, Inc.
10.375%, due 3/15/16 4,400,000 4,554,000
SS&C Technologies, Inc.
11.75%, due 12/1/13 15,440,000 16,636,600
--------------
28,606,625
--------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
TELECOMMUNICATIONS (4.3%)
Centennial Cellular Operating Co./ Centennial
Communications Corp.
10.125%, due 6/15/13 $ 17,770,000 $ 18,880,625
Dobson Cellular Systems, Inc.
8.375%, due 11/1/11 3,775,000 4,001,500
Series B
8.375%, due 11/1/11 8,070,000 8,554,200
9.875%, due 11/1/12 8,605,000 9,314,913
GCI, Inc.
7.25%, due 2/15/14 6,290,000 5,747,488
Intelsat Corp.
9.00%, due 6/15/16 10,900,000 11,145,250
iPCS, Inc.
7.481%, due 5/1/13 (f) 2,000,000 1,950,000
Lucent Technologies, Inc.
5.50%, due 11/15/08 (d) 8,959,000 8,869,410
V 6.45%, due 3/15/29 46,776,000 39,057,960
6.50%, due 1/15/28 15,100,000 12,608,500
PAETEC Holding Corp.
9.50%, due 7/15/15 (c) 9,230,000 9,460,750
PanAmSat Corp.
9.00%, due 8/15/14 6,243,000 6,367,860
Qwest Communications International, Inc.
7.25%, due 2/15/11 12,620,000 12,746,200
Series B
7.50%, due 2/15/14 18,105,000 18,331,313
Qwest Corp.
7.20%, due 11/10/26 6,685,000 6,451,025
7.50%, due 10/1/14 6,400,000 6,680,000
7.50%, due 6/15/23 335,000 331,231
8.875%, due 3/15/12 13,755,000 15,061,725
--------------
195,559,950
--------------
TEXTILES (1.0%)
V INVISTA
9.25%, due 5/1/12 (c) 43,530,000 45,924,150
--------------
TRANSPORTATION (0.4%)
Atlantic Express Transportation Corp.
12.455%, due 4/15/12 (f) 12,445,000 11,947,200
St. Acquisition Corp.
12.50%, due 5/15/17 (c)(d) 10,745,000 6,849,938
--------------
18,797,138
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TRUCKING & LEASING (0.3%)
Greenbrier Cos., Inc.
8.375%, due 5/15/15 $ 12,835,000 $ 12,690,606
--------------
Total Corporate Bonds
(Cost $2,911,174,532) 2,937,341,755
--------------
FOREIGN BONDS (8.5%)
- ---------------------------------------------------------------------------------
CHEMICALS (0.2%)
Nova Chemicals Corp.
8.484%, due 11/15/13 (f) 9,020,000 8,862,150
--------------
COMMERCIAL SERVICES (0.5%)
Quebecor World, Inc.
9.75%, due 1/15/15 (c) 22,600,000 22,035,000
--------------
DIVERSIFIED FINANCIAL SERVICES (0.7%)
CEVA Group PLC
10.00%, due 9/1/14 (c) 10,180,000 10,599,925
Digicel, Ltd.
9.25%, due 9/1/12 (c) 12,255,000 12,561,375
Galaxy Entertainment Finance Co., Ltd.
9.875%, due 12/15/12 (c) 7,725,000 8,285,063
--------------
31,446,363
--------------
ELECTRIC (0.7%)
Intergen N.V.
9.00%, due 6/30/17 (c) 29,015,000 30,683,363
--------------
ELECTRONICS (1.0%)
NXP B.V./NXP Funding LLC
V 7.875%, due 10/15/14 39,000,000 38,073,750
9.50%, due 10/15/15 (d) 8,340,000 7,881,300
--------------
45,955,050
--------------
FOREST PRODUCTS & PAPER (0.2%)
Bowater Canada Finance
7.95%, due 11/15/11 5,740,000 4,922,050
Catalyst Paper Corp.
7.375%, due 3/1/14 5,190,000 3,801,675
--------------
8,723,725
--------------
HEALTH CARE-PRODUCTS (0.5%)
FMC Finance III S.A.
6.875%, due 7/15/17 (c) 23,525,000 23,583,813
--------------
MEDIA (1.9%)
CanWest MediaWorks, Inc.
8.00%, due 9/15/12 14,415,455 14,055,069
CanWest MediaWorks, L.P.
9.25%, due 8/1/15 (c) 16,130,000 16,371,950
</Table>
16 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FOREIGN BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
MEDIA (CONTINUED)
Quebecor Media, Inc.
7.75%, due 3/15/16 $ 19,695,000 $ 19,054,913
7.75%, due 3/15/16 (c) 11,800,000 11,387,000
Shaw Communications, Inc.
7.50%, due 11/20/13 C$22,825,000 25,972,151
Sun Media Corp.
7.625%, due 2/15/13 $ 40,000 39,400
Videotron Ltee
6.875%, due 1/15/14 2,411,000 2,404,973
--------------
89,285,456
--------------
PAPER & FOREST PRODUCTS (0.2%)
Norske Skog Canada, Ltd.
Series D
8.625%, due 6/15/11 9,865,000 7,793,350
--------------
PHARMACEUTICALS (0.2%)
Angiotech Pharmaceuticals, Inc.
9.371%, due 12/1/13 (f) 9,770,000 9,672,300
--------------
TELECOMMUNICATIONS (2.3%)
Inmarsat Finance PLC
(zero coupon), due 11/15/12
10.375%, beginning 11/15/08 22,335,000 21,553,275
Intelsat Subsidiary Holding Co., Ltd.
8.25%, due 1/15/13 19,360,000 19,505,200
Millicom International Cellular S.A.
10.00%, due 12/1/13 25,130,000 27,046,163
Nortel Networks, Ltd.
10.75%, due 7/15/16 (c) 16,380,000 17,076,150
Rogers Wireless, Inc.
8.00%, due 12/15/12 2,930,000 3,063,702
9.625%, due 5/1/11 15,685,000 17,627,917
Satelites Mexicanos S.A. de C.V.
13.948%, due 11/30/11 (f) 1,926,800 1,994,238
--------------
107,866,645
--------------
TRANSPORTATION (0.1%)
Kansas City Southern de
Mexico S.A. de C.V.
7.375%, due 6/1/14 (c) 4,090,000 4,090,000
--------------
Total Foreign Bonds
(Cost $381,856,034) 389,997,215
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LOAN ASSIGNMENTS & PARTICIPATIONS (9.0%)(I)
- ---------------------------------------------------------------------------------
AEROSPACE & DEFENSE (0.4%)
DAE Aviation Holdings
Asset Sale Term Loan
7.803%, due 7/21/09 $ 5,900,000 $ 5,885,250
Tranche B1 Term Loan
8.933%, due 7/31/14 7,794,102 7,779,488
Tranche B2 Term Loan
8.933%, due 7/31/14 5,900,898 5,889,833
--------------
19,554,571
--------------
AUTO MANUFACTURERS (0.5%)
Navistar International Corp.
Revolver
7.603%, due 1/19/12 6,400,000 6,276,800
Term Loan B
8.234%, due 1/3/12 17,600,000 17,261,200
--------------
23,538,000
--------------
AUTO MANUFACTURING (0.7%)
Daimler Chrysler Financial Services Americas LLC
2nd Lien Term Loan
11.86%, due 8/3/12 31,045,000 30,515,838
--------------
BROADCASTING (0.3%)
Cenveo Corp.
Bridge Loan
9.319%, due 8/31/15 (a) 13,635,000 13,635,000
--------------
HEALTH CARE-SERVICES (2.0%)
Community Health Systems, Inc.
New Term Loan B
7.756%, due 7/25/14 (j) 31,275,244 30,512,910
Fresenius Medical Care Holdings, Inc.
Term Loan
6.703%, due 3/31/13 6,300,000 6,213,375
V HCA, Inc.
Term Loan B
7.448%, due 11/18/13 31,561,500 30,800,300
Talecris Biotherapeutics, Inc.
1st Lien Term Loan
9.08%, due 12/6/13 7,443,750 7,387,922
2nd Lien Term Loan
12.08%, due 12/6/14 14,995,000 14,995,000
--------------
89,909,507
--------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 17
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LOAN ASSIGNMENTS & PARTICIPATIONS (CONTINUED)
- ---------------------------------------------------------------------------------
HOTELS, MOTELS, INNS & GAMING (0.9%)
Fontainebleau Las Vegas Resorts LLC
Term Loan B
8.948%, due 6/6/14 (j) $ 7,373,333 $ 7,175,175
Green Valley Ranch Gaming LLC
1st Lien Term Loan B
7.413%, due 2/16/14 5,516,952 5,379,028
LNR Property Corp.
Term Loan A1
8.11%, due 7/12/09 (j) 2,830,000 2,716,800
Initial Tranche B Term Loan
8.11%, due 7/12/11 25,475,000 24,799,913
--------------
40,070,916
--------------
MEDIA (0.6%)
Nielsen Finance LLC
Dollar Term Loan
7.36%, due 8/9/13 29,719,844 28,894,286
--------------
MINING (0.4%)
BHM Technologies LLC
1st Lien Term Loan
11.37%, due 7/21/13 21,900,766 18,779,907
--------------
PHARMACEUTICALS (0.2%)
Warner Chilcott Corp.
Tranche C Term Loan
7.198%, due 1/18/12 1,803,524 1,773,315
Tranche B Term Loan
7.245%, due 1/18/12 6,026,119 5,925,182
--------------
7,698,497
--------------
REAL ESTATE (1.2%)
Building Materials Corp. of America
2nd Lien Term Loan
10.813%, due 9/15/14 11,830,000 9,783,410
Neff Rental, Inc.
2nd Lien Term Loan
8.896%, due 11/20/14 4,400,000 3,952,665
OSI Restaurant Partners LLC
Revolver
5.523%, due 5/11/13 793,723 762,768
Term Loan B
7.063%, due 5/9/14 10,333,103 9,930,112
Rental Services Corp.
2nd Lien Term Loan
8.75%, due 11/27/13 8,901,478 8,662,251
Riverdeep Interactive Learning USA, Inc.
Bridge Loan
11.938%, due 12/21/14 4,867,302 4,846,007
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
REAL ESTATE (CONTINUED)
ServiceMaster Co. (The)
Bridge Loan
9.59%, due 12/31/07 (a) $ 11,230,000 $ 10,373,713
Town Sports International, Inc.
Term Loan
7.50%, due 2/27/14 6,825,700 6,450,287
--------------
54,761,213
--------------
RETAIL (0.9%)
Michaels Stores, Inc.
New Term Loan B
7.619%, due 10/31/13 8,581,658 8,201,336
Neiman Marcus Group, Inc. (The)
Term Loan B
7.448%, due 4/6/13 12,259,494 12,037,805
Toys "R" Us (Delaware), Inc.
Term Loan
10.125%, due 1/19/13 18,220,000 18,223,790
--------------
38,462,931
--------------
SOFTWARE (0.5%)
SunGard Data Systems, Inc.
Term Loan
7.356%, due 2/28/14 24,853,044 24,488,723
--------------
TELECOMMUNICATIONS (0.4%)
Qwest Corp.
Term Loan B
6.95%, due 6/30/10 18,000,000 18,300,006
Trilogy International Partners LLC
Term Loan
8.698%, due 6/29/12 1,350,000 1,329,750
--------------
19,629,756
--------------
Total Loan Assignments & Participations
(Cost $419,150,738) 409,939,145
--------------
YANKEE BONDS (0.8%)(K)
- ---------------------------------------------------------------------------------
FOREST PRODUCTS & PAPER (0.5%)
Abitibi-Consolidated, Inc.
8.85%, due 8/1/30 8,217,000 6,080,580
Smurfit Capital Funding PLC
7.50%, due 11/20/25 18,045,000 17,503,650
--------------
23,584,230
--------------
INSURANCE (0.3%)
Fairfax Financial Holdings, Ltd.
7.375%, due 4/15/18 (d) 6,117,000 5,688,810
7.75%, due 7/15/37 (d) 4,810,000 4,473,300
8.30%, due 4/15/26 (d) 2,375,000 2,268,125
--------------
12,430,235
--------------
</Table>
18 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
YANKEE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
TELECOMMUNICATIONS (0.0%)++
Nortel Networks Corp.
6.875%, due 9/1/23 $ 3,000,000 $ 2,400,000
--------------
Total Yankee Bonds
(Cost $35,482,336) 38,414,465
--------------
Total Long-Term Bonds
(Cost $3,816,895,460) 3,844,831,543
--------------
<Caption>
SHARES
COMMON STOCKS (3.3%)
- ---------------------------------------------------------------------------------
AGRICULTURE (0.0%)++
North Atlantic Trading Co., Inc. (a)(b)(h)(l) 2,156 22
--------------
AIRLINES (1.4%)
Delta Air Lines, Inc. (d)(h) 830,442 17,273,194
V Northwest Airlines, Inc. (h) 2,469,377 45,806,943
--------------
63,080,137
--------------
COMMERCIAL SERVICES (0.0%)++
Dinewise, Inc. (a)(b)(h) 8,434,374 84,344
--------------
HOLDING COMPANIES--DIVERSIFIED (0.0%)++
TLC Beatrice International Holdings (a)(b)(h) 25,000 25,000
--------------
MEDIA (0.8%)
Adelphia Contingent Value Vehicle (a)(b)(e)(h) 15,507,390 155,074
Belo Corp. Class A 430,200 7,958,700
CBS Corp. Class B 195,300 5,605,110
Digital On-Demand (a)(b)(h)(l) 1,095,395 10,954
Gannett Co., Inc. 208,800 8,855,208
Haights Cross Communications, Inc. (a)(b)(h)(l) 1,630,227 15,731,691
--------------
38,316,737
--------------
RETAIL (0.3%)
Star Gas Partners, L.P. (h) 2,601,650 11,915,557
--------------
SOFTWARE (0.1%)
QuadraMed Corp. (a)(h) 1,199,685 3,347,121
QuadraMed Corp. (a)(h) 434,011 1,210,891
--------------
4,558,012
--------------
</Table>
<Table>
<Caption>
SHARES VALUE
TELECOMMUNICATIONS (0.7%)
Loral Space & Communications, Ltd. (d)(h) 327,283 $ 13,215,688
Neon Communications Group, Inc. (b)(h)(l) 4,706,745 20,603,776
Remote Dynamics, Inc. (h) 358,615 538
--------------
33,820,002
--------------
Total Common Stocks
(Cost $184,797,705) 151,799,811
--------------
CONVERTIBLE PREFERRED STOCKS (0.6%)
- ---------------------------------------------------------------------------------
SOFTWARE (0.5%)
QuadraMed Corp.
5.50% (a)(c)(l) 950,000 22,325,000
--------------
TELECOMMUNICATIONS (0.1%)
Neon Communications Group, Inc.
6.00% (a)(b) 572,843 2,655,127
--------------
Total Convertible Preferred Stocks
(Cost $24,367,654) 24,980,127
--------------
PREFERRED STOCKS (1.2%)
- ---------------------------------------------------------------------------------
MEDIA (0.0%)++
Ziff Davis Holdings, Inc.
10.00% (a) 4,240 63,600
--------------
REAL ESTATE INVESTMENT TRUSTS (0.9%)
V Sovereign Real Estate Investment Corp.
12.00% (a)(c) 29,881 41,728,817
--------------
TELECOMMUNICATIONS (0.3%)
Loral Skynet Corp.
12.00% Series A (g) 65,432 13,119,116
--------------
Total Preferred Stocks
(Cost $41,734,809) 54,911,533
--------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 19
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
NUMBER OF
WARRANTS VALUE
WARRANTS (0.0%)++
- ---------------------------------------------------------------------------------
MEDIA (0.0%)++
Haights Cross Communications, Inc.
Strike Price $0.001
Expire 7/31/08 (a)(b)(h)(l) 13,754 $ 132,589
Ziff Davis Holdings, Inc.
Strike Price $0.001
Expire 8/12/12 (b)(h) 777,370 7,774
--------------
Total Warrants
(Cost $11,393) 140,363
--------------
SHARES
SHORT-TERM INVESTMENTS (10.9%)
- ---------------------------------------------------------------------------------
INVESTMENT COMPANY (2.7%)
State Street Navigator Securities Lending Prime
Portfolio (m) 125,682,612 125,682,612
--------------
Total Investment Company
(Cost $125,682,612) 125,682,612
--------------
PRINCIPAL
AMOUNT
U.S. GOVERNMENT (8.2%)
United States Treasury Bills
3.105%, due 11/15/07 $124,490,000 124,339,678
3.458%, due 11/15/07 4,235,000 4,229,305
3.607%, due 11/1/07 70,290,000 70,290,000
3.625%, due 11/8/07 300,000 299,789
3.687%, due 11/8/07 555,000 554,602
3.78%, due 11/8/07 17,565,000 17,552,090
3.826%, due 11/23/07 129,075,000 128,773,208
3.858%, due 11/23/07 4,800,000 4,788,682
3.927%, due 11/23/07 6,070,000 6,055,433
4.016%, due 11/8/07 3,930,000 3,926,931
4.162%, due 11/8/07 11,480,000 11,470,709
--------------
Total U.S. Government
(Cost $372,280,427) 372,280,427
--------------
Total Short-Term Investments
(Cost $497,963,039) 497,963,039
--------------
Total Investments
(Cost $4,565,770,060) 100.3% 4,574,626,416(n)
Liabilities in Excess of
Cash and Other Assets (0.3) (12,374,229)
------------ --------------
Net Assets 100.0% $4,562,252,187
============ ==============
</Table>
<Table>
++ Less than one-tenth of a percent.
(a) Illiquid security. The total market value of these securities at October
31, 2007 is $114,865,720, which represents 2.5% of the Fund's net assets.
(b) Fair valued security. The total market value of these securities at October
31, 2007 is $42,772,200, which reflects 0.9% of the Fund's net assets.
(c) May be sold to institutional investors only under Rule 144a or securities
offered pursuant to Section 4(2) of the Securities Act of 1933, as amended.
(d) Represents a security, or a portion thereof, which is out on loan. The
aggregate market value of such securities is $122,604,789; cash collateral
of $125,682,612 (included in liabilities) was received with which the Fund
purchased highly liquid short-term investments.
(e) Issue in default.
(f) Floating rate. Rate shown is the rate in effect at October 31, 2007.
(g) PIK ("Payment in Kind")--interest or dividend payment is made with
additional securities.
(h) Non-income producing security.
(i) Floating Rate Loan--generally pays interest at rates which are periodically
re-determined at a margin above the London Inter-Bank Offered Rate
("LIBOR") or other short-term rates. The rate shown is the rate(s) in
effect at October 31, 2007. Floating Rate Loans are generally considered
restrictive in that the Fund is ordinarily contractually obligated to
receive consent from the Agent Bank and/or borrower prior to disposition of
a Floating Rate Loan.
(j) This security has additional commitments and contingencies. Principal
amount and value exclude unfunded commitment.
(k) Yankee Bond--dollar-denominated bond issued in the United States by a
foreign bank or corporation.
(l) Restricted security.
(m) Represents a security, or a portion thereof, purchased with cash collateral
received for securities on loan.
(n) At October 31, 2007, cost is $4,576,684,087 for federal income tax purposes
and net unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 153,837,935
Gross unrealized depreciation (155,895,606)
-------------
Net unrealized depreciation $ (2,057,671)
=============
</Table>
The following abbreviations are used in the above portfolio:
C$--Canadian Dollar
20 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2007
<Table>
ASSETS:
Investment in securities, at value
(identified cost $4,565,770,060) including
$122,604,789 market value of securities
loaned $4,574,626,416
Cash 288,988
Receivables:
Dividends and interest 88,940,376
Investment securities sold 47,639,332
Fund shares sold 7,409,411
Other assets 63,903
--------------
Total assets 4,718,968,426
--------------
LIABILITIES:
Securities lending collateral 125,682,612
Unrealized depreciation on unfunded
commitments 145,060
Payables:
Investment securities purchased 9,601,390
Fund shares redeemed 7,635,107
Manager (See Note 3) 2,332,843
NYLIFE Distributors (See Note 3) 1,772,749
Transfer agent (See Note 3) 1,292,861
Shareholder communication 428,786
Professional fees 185,377
Trustees 61,477
Custodian 30,558
Accrued expenses 35,771
Dividend payable 7,511,648
--------------
Total liabilities 156,716,239
--------------
Net assets $4,562,252,187
==============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding
(par value of $.01 per share) unlimited
number of shares authorized $ 7,197,791
Additional paid-in capital 5,161,753,255
--------------
5,168,951,046
Accumulated distributions in excess of net
investment income (14,070,040)
Accumulated net realized loss on investments
and foreign currency transactions (601,526,357)
Net unrealized appreciation on investments 8,856,356
Net unrealized depreciation on unfunded
commitments (145,060)
Net unrealized appreciation on translation
of other assets and liabilities in foreign
currencies and foreign currency forward
contracts 186,242
--------------
Net assets $4,562,252,187
==============
CLASS A
Net assets applicable to outstanding shares $2,887,965,355
==============
Shares of beneficial interest outstanding 455,039,716
==============
Net asset value per share outstanding $ 6.35
Maximum sales charge (4.50% of offering
price) 0.30
--------------
Maximum offering price per share outstanding $ 6.65
==============
CLASS B
Net assets applicable to outstanding shares $ 811,936,853
==============
Shares of beneficial interest outstanding 128,613,999
==============
Net asset value and offering price per share
outstanding $ 6.31
==============
CLASS C
Net assets applicable to outstanding shares $ 422,347,712
==============
Shares of beneficial interest outstanding 66,881,277
==============
Net asset value and offering price per share
outstanding $ 6.31
==============
CLASS I
Net assets applicable to outstanding shares $ 440,002,267
==============
Shares of beneficial interest outstanding 69,244,154
==============
Net asset value and offering price per share
outstanding $ 6.35
==============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 21
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2007
<Table>
INVESTMENT INCOME:
INCOME:
Interest $362,222,980
Dividends (a) 5,668,367
Income from securities loaned--net 888,656
-------------
Total income 368,780,003
-------------
EXPENSES:
Manager (See Note 3) 25,634,409
Distribution--Class B (See Note 3) 7,197,704
Distribution--Class C (See Note 3) 3,283,598
Distribution/Service--Class A (See Note 3) 7,386,948
Service--Class B (See Note 3) 2,399,235
Service--Class C (See Note 3) 1,094,533
Transfer agent--Classes A, B and C (See Note
3) 6,928,415
Transfer agent--Class I (See Note 3) 433,105
Professional fees 1,144,061
Shareholder communication 1,021,851
Recordkeeping 485,776
Trustees 257,472
Registration 153,013
Custodian 118,388
Miscellaneous 150,781
-------------
Total expenses 57,689,289
-------------
Net investment income 311,090,714
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) on:
Security transactions 32,500,782
Foreign currency transactions (242,655)
-------------
Net realized gain on investments and foreign
currency transactions 32,258,127
-------------
Net change in unrealized appreciation
(depreciation) on:
Security transactions and unfunded
commitments (35,986,555)
Translation of other assets and liabilities
in foreign currencies and foreign currency
forward contracts 99,209
-------------
Net change in unrealized appreciation on
investments unfunded commitments and foreign
currency transactions (35,887,346)
-------------
Net realized and unrealized loss on
investments, foreign currency transactions
and unfunded commitments (3,629,219)
-------------
Net increase in net assets resulting from
operations $307,461,495
=============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of $1,920.
22 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2007 AND OCTOBER 31, 2006
<Table>
<Caption>
2007 2006
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 311,090,714 $ 281,748,068
Net realized gain on
investments and foreign
currency transactions 32,258,127 36,334,852
Net increase from payments from
Manager for losses
attributable to shareholder
trading arrangements (See Note
3(B) on page 29.) -- 814,000
Net change in unrealized
appreciation (depreciation) on
investments unfunded
commitments and foreign
currency transactions (35,887,346) 69,828,338
---------------------------------
Net increase in net assets
resulting from operations 307,461,495 388,725,258
---------------------------------
Dividends and distributions to shareholders:
From net investment income:
Class A (201,074,715) (161,212,425)
Class B (58,146,580) (83,794,542)
Class C (26,633,406) (24,518,618)
Class I (19,653,124) (6,209,368)
---------------------------------
(305,507,825) (275,734,953)
---------------------------------
Return of capital:
Class A -- (20,078,416)
Class B -- (10,436,303)
Class C -- (3,053,704)
Class I -- (773,354)
---------------------------------
-- (34,341,777)
---------------------------------
Total dividends and
distributions to shareholders (305,507,825) (310,076,730)
---------------------------------
</Table>
<Table>
<Caption>
2007 2006
Capital share transactions:
Net proceeds from sale of
shares $ 1,182,140,958 $ 1,053,015,360
Net asset value of shares
issued to shareholders in
reinvestment of dividends and
distributions 211,122,679 207,923,266
Cost of shares redeemed + (1,245,670,610) (1,264,875,472)
Net asset value of shares
converted
(See Note 1):
Class A 130,264,283 1,096,223,143
Class B (130,264,283) (1,096,223,143)
---------------------------------
Increase (decrease) in net
assets derived from capital
share transactions 147,593,027 (3,936,846)
---------------------------------
Net increase in net assets 149,546,697 74,711,682
NET ASSETS:
Beginning of year 4,412,705,490 4,337,993,808
---------------------------------
End of year $ 4,562,252,187 $ 4,412,705,490
=================================
Accumulated distributions in
excess of net investment income
at end of year $ (14,070,040) $ (16,695,785)
=================================
</Table>
+ Cost of shares redeemed net of redemption fees of $212,054 and $170,964 for
the years ended October 31, 2007 and 2006, respectively.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 23
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
----------------------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning
of period $ 6.33 $ 6.22 $ 6.32 $ 6.05 $ 4.95 $ 5.56
---------- ---------- ---------- ---------- ----------- -------------
Net investment income 0.45(a) 0.42(a) 0.45 0.46(a) 0.39 0.51
Net realized and unrealized
gain (loss) on investments 0.01 0.15(e) (0.09) 0.25 1.12 (0.54)
Net realized and unrealized
gain (loss) on foreign
currency transactions 0.00(b) (0.00)(b) 0.00(b) 0.02 0.00(b) (0.02)
---------- ---------- ---------- ---------- ----------- -------------
Total from investment
operations 0.46 0.57 0.36 0.73 1.51 (0.05)
---------- ---------- ---------- ---------- ----------- -------------
Less dividends and
distributions:
From net investment income (0.44) (0.41) (0.46) (0.46) (0.40) (0.51)
Return of capital -- (0.05) -- -- (0.01) (0.05)
---------- ---------- ---------- ---------- ----------- -------------
Total dividends and
distributions (0.44) (0.46) (0.46) (0.46) (0.41) (0.56)
---------- ---------- ---------- ---------- ----------- -------------
Redemption fee (a) 0.00(b) 0.00(b) 0.00(b) 0.00(b) -- --
---------- ---------- ---------- ---------- ----------- -------------
Net asset value at end of
period $ 6.35 $ 6.33 $ 6.22 $ 6.32 $ 6.05 $ 4.95
========== ========== ========== ========== =========== =============
Total investment return (c) 7.41% 9.58%(d)(e) 5.86% 12.53% 31.57%(f) (0.78%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 6.95% 6.77% 7.10% 7.44% 8.43%+ 9.63%
Net expenses 1.04% 1.06% 1.02% 1.01% 1.01%+ 1.07%
Expenses (before
reimbursement) 1.04% 1.07%(d) 1.02% 1.01% 1.01%+ 1.08%
Portfolio turnover rate 49% 58% 35% 41% 47% 50%
Net assets at end of period
(in 000's) $2,887,965 $2,806,800 $1,381,080 $1,279,164 $1,265,856 $850,899
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of
period $ 6.30 $ 6.19 $ 6.30 $ 6.04 $ 4.94 $ 5.55
---------- -------- -------- -------- ----------- ------------
Net investment income 0.40(a) 0.38(a) 0.40 0.42(a) 0.36 0.46
Net realized and unrealized gain
(loss) on investments 0.00(b) 0.15(e) (0.09) 0.24 1.12 (0.53)
Net realized and unrealized gain
(loss) on foreign currency
transactions 0.00(b) (0.00)(b) 0.00(b) 0.02 0.00(b) (0.02)
---------- -------- -------- -------- ----------- ------------
Total from investment operations 0.40 0.53 0.31 0.68 1.48 (0.09)
---------- -------- -------- -------- ----------- ------------
Less dividends and distributions:
From net investment income (0.39) (0.37) (0.42) (0.42) (0.38) (0.48)
Return of capital -- (0.05) -- -- (0.00)(b) (0.04)
---------- -------- -------- -------- ----------- ------------
Total dividends and distributions (0.39) (0.42) (0.42) (0.42) (0.38) (0.52)
---------- -------- -------- -------- ----------- ------------
Redemption fee (a) 0.00(b) 0.00(b) 0.00(b) 0.00(b) -- --
---------- -------- -------- -------- ----------- ------------
Net asset value at end of period $ 6.31 $ 6.30 $ 6.19 $ 6.30 $ 6.04 $ 4.94
========== ======== ======== ======== =========== ============
Total investment return (c) 6.63% 8.91%(d)(e) 5.04% 11.65% 30.82%(f) (1.53 %)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 6.20% 6.02% 6.35% 6.69% 7.68%+ 8.88%
Net expenses 1.79% 1.81% 1.77% 1.76% 1.76%+ 1.82%
Expenses (before reimbursement) 1.79% 1.82%(d) 1.77% 1.76% 1.76%+ 1.83%
Portfolio turnover rate 49% 58% 35% 41% 47% 50%
Net assets at end of period (in
000's) $422,348 $421,855 $401,923 $419,496 $422,392 $236,791
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Less than one cent per share.
(c) Total return is calculated exclusive of sales charge. Class I is not subject to sales
charges.
(d) Includes nonrecurring reimbursements from Manager for professional fees. The effect on
total return was less than one hundredth of a percent.
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses were less than $0.01 per share
on net realized gains on investments and the effect on total investment return was less
than 0.01%, respectively.
(f) Total return is not annualized.
</Table>
24 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
-------------------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
$ 6.30 $ 6.19 $ 6.30 $ 6.04 $ 4.94 $ 5.55
---------- ---------- ---------- ---------- ----------- ------------
0.40 (a) 0.38 (a) 0.40 0.42 (a) 0.36 0.46
0.00 (b) 0.15 (e) (0.08) 0.24 1.12 (0.53)
0.00 (b) (0.00)(b) 0.00 (b) 0.02 0.00 (b) (0.02)
---------- ---------- ---------- ---------- ----------- ------------
0.40 0.53 0.32 0.68 1.48 (0.09)
---------- ---------- ---------- ---------- ----------- ------------
(0.39) (0.37) (0.43) (0.42) (0.38) (0.48)
-- (0.05) -- -- (0.00)(b) (0.04)
---------- ---------- ---------- ---------- ----------- ------------
(0.39) (0.42) (0.43) (0.42) (0.38) (0.52)
---------- ---------- ---------- ---------- ----------- ------------
0.00 (b) 0.00 (b) 0.00 (b) 0.00 (b) -- --
---------- ---------- ---------- ---------- ----------- ------------
$ 6.31 $ 6.30 $ 6.19 $ 6.30 $ 6.04 $ 4.94
========== ========== ========== ========== =========== ============
6.46% 8.92%(d)(e) 5.04% 11.65% 30.82%(f) (1.53%)
6.19% 6.02% 6.35% 6.69% 7.68%+ 8.88%
1.79% 1.81% 1.77% 1.76% 1.76%+ 1.82%
1.79% 1.82%(d) 1.77% 1.76% 1.76%+ 1.83%
49% 58% 35% 41% 47% 50%
$811,937 $1,067,018 $2,486,331 $2,814,176 $2,876,134 $2,211,253
</Table>
<Table>
<Caption>
CLASS I
----------------------------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2007 2006 2005 2004
$ 6.34 $ 6.22 $ 6.32 $ 6.24
---------- -------- ------- -----------
0.47 (a) 0.44 (a) 0.48 0.41 (a)
0.00 (b) 0.16 (0.10) 0.07
0.00 (b) (0.00)(b) 0.00 (b) 0.00 (b)
---------- -------- ------- -----------
0.47 0.60 0.38 0.48
---------- -------- ------- -----------
(0.46) (0.43) (0.48) (0.40)
-- (0.05) -- --
---------- -------- ------- -----------
(0.46) (0.48) (0.48) (0.40)
---------- -------- ------- -----------
0.00 (b) 0.00 (b) 0.00 (b) 0.00 (b)
---------- -------- ------- -----------
$ 6.35 $ 6.34 $ 6.22 $ 6.32
========== ======== ======= ===========
7.49% 10.02%(d)(e) 6.12% 7.97%(f)
7.26% 7.03% 7.31% 7.79%+
0.79% 0.80% 0.81% 0.66%+
0.79% 0.81% 0.81% 0.66%+
49% 58% 35% 41%
$440,002 $117,032 $68,659 $22,868
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 25
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises nineteen funds (collectively referred to as the
"Funds"). These financial statements and notes relate only to MainStay High
Yield Corporate Bond Fund (the "Fund"), a diversified fund.
The Fund currently offers four classes of shares. Class A shares commenced on
January 3, 1995. Class B shares commenced on May 1, 1986. Class C shares
commenced on September 1, 1998. Class I shares commenced on January 2, 2004.
Class A shares are offered at net asset value per share plus an initial sales
charge. No sales charge applies on investments of $1 million or more (and
certain other qualified purchases) in Class A shares, but a contingent deferred
sales charge is imposed on certain redemptions of such shares within one year of
the date of purchase. Class B shares and Class C shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within up to six years of purchase of Class B
shares and a 1% contingent deferred sales charge may be imposed on redemptions
made within one year of purchase of Class C shares. Class I shares are not
subject to a sales charge. As approved by the Board of Trustees in 1997, Class B
shares convert to Class A shares eight years after the date they were purchased.
The four classes of shares bear the same voting (except for issues that relate
solely to one class), dividend, liquidation and other rights and conditions
except that Class B and Class C shares are subject to higher distribution fee
rates than Class A shares under a distribution plan pursuant to Rule 12b-1 under
the 1940 Act. Class I shares are not subject to a distribution or service fee.
The Fund's investment objective is to seek maximum current income through
investment in a diversified portfolio of high yield debt securities. Capital
appreciation is a secondary objective.
The Fund invests in high yield securities (sometimes called "junk bonds"), which
are generally considered speculative because they present a greater risk of
loss, including default, than higher quality debt securities. These securities
pay a premium--a high interest rate or yield--because of the increased risk of
loss. These securities can also be subject to greater price volatility.
The Fund also invests in foreign securities, which carry certain risks that are
in addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country, industry or region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent or brokers selected by the Fund's Manager, as defined in Note 3,
whose prices reflect broker/dealer supplied valuations and electronic data
processing techniques, if such prices are deemed by the Fund's Manager to be
representative of market values, at the regular close of trading of the New York
Stock Exchange (generally 4:00 p.m. Eastern time) on each day the Fund is open
for business.
Equity securities are valued at the latest quoted sales prices as of the close
of trading on the New York Stock Exchange on each day the Fund is open for
business ("valuation date"). Securities that are not traded on the valuation
date are valued at the mean of the latest quoted bid and asked prices. Prices
normally are taken from the principal market in which each security trades.
Investments in mutual funds are valued at their net asset value as of the close
of the New York Stock Exchange on the date of valuation.
Loans are valued at the average of bid quotations obtained from a pricing
service. The Trust has engaged an independent pricing service to provide market
value quotations from dealers in loans. As of October 31, 2007, 100% of total
investments in loans were valued based on prices from such services.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost. Loans are
valued at the average of bid quotations obtained from a pricing service. The
Company has engaged an independent pricing service to provide market value
quotations from dealers in loans. As of October 31, 2007, 100% of total
investments in loans were valued based on prices from such services.
26 MainStay High Yield Corporate Bond Fund
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: a security the trading for which has been
halted or suspended; a debt security that has recently gone into default and for
which there is not a current market quotation; a security of an issuer that has
entered into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; a security where the trading on that security's principal market
is temporarily closed at a time when, under normal conditions, it would be open.
At October 31, 2007, the Fund held securities with a value of $42,772,200 that
were valued in such a manner.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. These events may include, but are not limited to, situations
relating to a single issue in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. Should the
Manager or Subadvisor, as defined in Note 3, conclude that such events may have
effected the accuracy of the last price reported on the local foreign market,
the Manager or Subadvisor may, pursuant to procedures adopted by the Fund,
adjust the value of the local price to reflect the impact on the price of such
securities as a result of such events. Additionally, international equity
securities are also fair valued whenever the movement of a particular index
exceeds certain thresholds. In such cases, the securities are fair valued by
applying factors provided by a third party vendor in accordance with the Fund's
policies and procedures.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
of net investment income monthly and distributions of net realized capital and
currency gains, if any, annually. All dividends and distributions are reinvested
in shares of the Fund, at net asset value, unless the shareholder elects
otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America. Permanent
book/tax differences relating to income and gains are reclassified amongst
undistributed net investment income, accumulated net realized gain or loss and
paid-in-capital.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities
purchased, other than short-term securities, for the Fund are accreted and
amortized, respectively, on the constant yield method over the life of the
respective securities or, in the case of a callable security, over the period to
the first date of call. Discounts and premiums on short-term securities are
accreted and amortized, respectively, on the straight line method. Income from
payment-in-kind securities is recorded daily based on the effective interest
method of accrual.
The investment income and realized and unrealized gains and losses on
investments of the Fund are allocated to separate classes of shares based upon
their relative net assets on the date the income is earned or realized and
unrealized gains and losses are incurred.
The Fund may place a debt obligation on non-accrual status and reduce related
interest income by ceasing current accruals and writing off interest receivables
when the collection of all or a portion of interest has become doubtful based on
consistently applied procedures. A debt obligation is removed from non-accrual
status when the issuer resumes interest payments or when collectibility of
interest is reasonably assured.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (C) on
page 29) are allocated to separate classes of shares pro rata based upon their
relative net assets value on the date the expenses are incurred. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
www.mainstayfunds.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(G) LOAN ASSIGNMENTS, PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan
assignments and loan participations. Loan assignments and participations are
agreements to make money available (a "commitment") to a borrower in a specified
amount, at a specified rate and within a specified time. Such loan assignments
and participations are typically senior, secured and collateralized in nature.
The Fund records an investment when the borrower withdraws money and records
interest as earned. These loans pay interest at rates which are periodically
reset by reference to a base lending rate plus a spread. These base lending
rates are generally the prime rate offered by a designated U.S. bank or London
InterBank Offered Rate ("LIBOR").
The loans in which the Fund invests are generally readily marketable, but may be
subject to some restrictions on resale. For example, the Fund may be
contractually obligated to receive approval from the agent bank and/or borrower
prior to the sale of these investments.
The Fund assumes the credit risk of the borrower, the selling participant and
any other persons interpositioned between the Fund and the borrower
("intermediate participants"). In the event that the borrower, selling
participant or intermediate participants becomes insolvent or enters into
bankruptcy, the Fund may incur certain costs and delays in realizing payment, or
may suffer a loss of principal and/or interest.
Unfunded commitments represent the remaining obligation of the Fund to the
borrower. At any point in time, up to the maturity date of the issue, the
borrower may demand the unfunded portion. These unfunded amounts are recorded in
memorandum accounts. (See Note 5 on page 30.)
(H) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Prices of securities denominated in foreign currency amounts
are translated into U.S. dollars at the mean between the buying and selling
rates last quoted by any major U.S. bank at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date,
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities are presented at the exchange rates and market values
at the close of the period. The realized and unrealized changes in net assets
arising from fluctuations in exchange rates and market prices of securities are
not separately presented.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains or losses
realized as a result of differences between the amounts of securities sale
proceeds or purchase cost, dividends, interest and withholding taxes as recorded
on the Fund's books, and the U.S. dollar equivalent amount actually received or
paid. Net currency gains or losses from valuing such foreign currency
denominated assets and liabilities, other than investments at valuation date
exchange rates, are reflected in unrealized foreign exchange gains or losses.
(I) SECURITIES LENDING. In order to realize additional income the Fund may lend
its securities to broker-dealers and financial institutions. The loans are
collateralized by cash or securities at least equal at all times to the market
value of the securities loaned. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. The Fund may bear
the risk of delay in recovery of, or loss of rights in, the securities loaned
should the borrower of the securities experience financial difficulty. The Fund
receives compensation for lending its securities in the form of fees or it
retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(J) RESTRICTED SECURITIES. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933. The Fund may not
have the right to demand that such securities be registered. Disposal of these
securities may involve time-consuming negotiations and expenses and it may be
difficult to obtain a prompt sale at an acceptable price.
(K) REDEMPTION FEE. The Fund imposes a 2.00% redemption fee on redemptions
(including exchanges) of Fund shares made within 60 days of their date of
purchase for any class. The redemption fee is designed to offset brokerage
commissions and other costs associated with short-term trading and is not
assessed on shares acquired through the reinvestment of dividends or
distributions paid by the Fund. The redemption fees are included in the
Statement of Changes in Net Assets' shares redeemed amount and retained by the
Fund.
(L) INDEMNIFICATIONS. In the normal course of business, the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote.
However, there can be no assurance that material liabilities related to such
obligations
28 MainStay High Yield Corporate Bond Fund
will not arise in the future which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager") a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. NYLIM provides offices and conducts clerical, recordkeeping and
bookkeeping services, and is responsible for the financial and accounting
records required to be maintained by the Fund. NYLIM also pays the salaries and
expenses of all personnel affiliated with the Fund and all the operational
expenses that are not the responsibility of the Fund. MacKay Shields LLC (the
"Subadvisor"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life, serves as subadvisor to the Fund and is responsible
for the day-to-day portfolio management of the Fund. Pursuant to the terms of a
Subadvisory Agreement between NYLIM and the Subadvisor, NYLIM pays for the
services of the Subadvisor.
The Fund is contractually obligated to pay NYLIM a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.60% on assets up to $500 million; 0.55% on assets from
$500 million to $5 billion and 0.525% on assets in excess of $5 billion. Prior
to August 1, 2007, the Fund was contractually obligated to pay NYLIM a monthly
fee for services performed and facilities furnished at an annual rate of the
Fund's average daily net assets as follows: 0.60% on assets up to $500 million
and 0.55% on assets in excess of $500 million. For the year ended October 31,
2007, NYLIM earned fees from the Fund in the amount of $25,634,409. It was not
necessary for NYLIM to reimburse the Fund for expenses for the year ended
October 31, 2007.
State Street Bank & Trust Company ("SSBT"), One Lincoln Street, Boston,
Massachusetts, 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with NYLIM. These services include calculating
daily net asset values of the Fund, maintaining general ledger and sub-ledger
accounts for the calculation of the Fund's respective net asset values, and
assisting NYLIM in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, SSBT is compensated by
NYLIM.
(B) PAYMENT FROM AFFILIATES. NYLIM reimbursed or paid all expenses relating to
the Board of Trustees' review of certain shareholder trading matters as
described below in the footnote relating to "Other Matters". (See Note 11 on
page 32.)
The total costs associated with the Board of Trustees' review were approximately
$849,975 and included payments to certain third party service providers.
The amount that was reimbursed to the Fund was $388,736. Additional payments
were made by affiliates relating to the shareholder trading matters. Further
discussion regarding those payments by affiliates can be found below in the
footnote relating to "Other Matters."
(C) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, other than Class I shares, has adopted distribution plans
(the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940
Act. Pursuant to the Class A Plan, the Distributor receives a monthly
distribution fee from the Fund at an annual rate of 0.25% of the average daily
net assets of the Fund's Class A shares, which is an expense of the Class A
shares of the Fund for distribution or service activities as designated by the
Distributor. Pursuant to the Class B and Class C Plans, the Fund pays the
Distributor a monthly distribution fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The Plans provide that the
Class B and Class C shares of the Fund also incur a service fee at the annual
rate of 0.25% of the average daily net asset value of the Class B and Class C
shares of the Fund. Class I shares are not subject to a distribution or service
fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(D) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $637,611 for the year
ended October 31, 2007. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $51,050, $1,359,216 and $79,935, respectively, for the year ended
October 31, 2007.
(E) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund, for the year ended October 31, 2007,
amounted to $7,361,520.
www.mainstayfunds.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(F) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts, effective March 1, 2007. Shareholders with an account
balance of less than $1,000 are charged an annual per account fee of $20
(assessed semi-annually).
(G) CAPITAL. At October 31, 2007, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $ 246,137 0.0*%
- ----------------------------------------------------------
Class C 112 0.0*
- ----------------------------------------------------------
Class I 7,372,592 1.7
- ----------------------------------------------------------
</Table>
* Less than one-tenth of a percent.
(H) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2007, these fees, which are included in professional fees
shown on the Statement of Operations, were $175,605.
The Fund pays the Manager a monthly fee for certain pricing and recordkeeping
services provided under the Accounting Agreement at the annual rate of 1/20 of
1% for the first $20 million of average monthly net assets, 1/30 of 1% of the
next $80 million of average monthly net assets and 1/100 of 1% of any amount in
excess of $100 million of average monthly net assets. Fees for these services
provided to the Fund by the Manager amounted to $485,776 for the year ended
October 31, 2007.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2007, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$1,805,262 $(594,767,433) $(11,720,199) $(2,016,489) $(606,698,859)
------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals, premium amortization adjustments and
partnership adjustments.
The other temporary differences are primarily due to distribution payable and
interest on defaulted securities.
The following table discloses the current year reclassifications between
accumulated distributions in excess of net investment income and accumulated net
realized loss on investments, arising from permanent differences; net assets at
October 31, 2007 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) PAID-IN
INCOME (LOSS) ON INVESTMENTS CAPITAL
$ (2,957,144) $(1,101,852) $ 4,058,996
------------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to premium amortization
adjustments, paydown gain (loss), foreign currency gain (loss) and prior year
return of capital.
At October 31, 2007, for federal income tax purposes, capital loss carryforwards
of $594,767,433 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. To the extent that these loss carryforwards are used to
offset future capital gains, it is probable that the capital gains so offset
will not be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2009 $ 84,769
2010 169,119
2011 306,034
2014 34,845
-------------------------------------------
$594,767
-------------------------------------------
</Table>
The Fund utilized $37,920,713 of capital loss carryforwards during the year
ended October 31, 2007.
<Table>
<Caption>
2007 2006
Distributions paid from:
Ordinary Income $305,507,825 $275,734,953
Return of Capital -- 34,341,777
- -----------------------------------------------------------------
$305,507,825 $310,076,730
- -----------------------------------------------------------------
</Table>
NOTE 5--COMMITMENTS AND CONTINGENCIES:
At October 31, 2007 the Fund had unfunded loan commitments pursuant to the
following loan agreements:
<Table>
<Caption>
UNFUNDED UNREALIZED
BORROWER COMMITMENT DEPRECIATION
Community Health Systems,
Inc. Delayed Draw Term Loan
due 7/25/14 $2,244,260 $(54,688)
- --------------------------------------------------------
Fontainebleau Las Vegas
Resorts LLC
Delayed Draw Term Loan
due 6/6/14 3,686,667 (90,372)
- --------------------------------------------------------
LNR Property Corp.
Term Loan A2 Subsequent
Draw
due 7/12/09 2,830,000 --
- --------------------------------------------------------
</Table>
The commitment is available until the maturity date of the security.
30 MainStay High Yield Corporate Bond Fund
NOTE 6--RESTRICTED SECURITIES:
Restricted securities held at October 31, 2007:
<Table>
<Caption>
PRINCIPAL
AMOUNT/
NUMBER OF
DATE(S) OF WARRANTS/ 10/31/07 PERCENTAGE OF
SECURITY ACQUISITION SHARES COST VALUE NET ASSETS
At Home Corp.
Convertible Bond 7/25/01 $61,533,853 $ 0 $ 6,153 0.0(a)%
- -------------------------------------------------------------------------------------------------------------------------------
Digital On-Demand
Common Stock 1/18/05 1,095,395 0 10,954 0.0(a)
- -------------------------------------------------------------------------------------------------------------------------------
Haights Cross Communications, Inc.
Common Stock 1,630,227 18,548,475 15,731,691 0.3
Warrants 1/22/04-9/6/07 13,754 4,097 132,589 0.0(a)
- -------------------------------------------------------------------------------------------------------------------------------
Neon Communications Group, Inc.
Common Stock 10/4/01-10/3/07 4,706,745 2,604,918 20,603,776 0.5
- -------------------------------------------------------------------------------------------------------------------------------
North Atlantic Trading Co., Inc.
Common Stock 4/21/04 2,156 22 22 0.0(a)
- -------------------------------------------------------------------------------------------------------------------------------
QuadraMed Corp.
Convertible Preferred Stock 6/16/04 950,000 22,798,000 22,325,000 0.5
- -------------------------------------------------------------------------------------------------------------------------------
$43,955,512 $58,810,185 1.3%
- -------------------------------------------------------------------------------------------------------------------------------
</Table>
(a) Less than one-tenth of a percent.
NOTE 7--CUSTODIAN:
SSBT is the custodian of cash and securities of the Fund. Custodial fees are
charged to the Fund based on the market value of securities in the Fund and the
number of certain cash transactions incurred by the Fund.
NOTE 8--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. These funds pay a commitment fee, at an annual rate of .060% of the
average commitment amount, regardless of usage, to The Bank of New York, which
acts as agent to the syndicate. Such commitment fees are allocated among the
funds based upon net assets and other factors. Interest on any revolving credit
loan is charged based upon the Federal Funds Advances rate. There were no
borrowings made or outstanding on the line of credit during the year ended
October 31, 2007.
NOTE 9--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2007, purchases and sales of securities, other
than short-term securities, were $2,248,494 and $2,019,007, respectively.
NOTE 10--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 99,430 $ 643,212
Shares issued to shareholders in
reinvestment of dividends: 22,053 141,725
Shares redeemed (129,932) (834,750)
---------------------------
Net decrease in shares outstanding
before conversion (8,449) (49,813)
Shares converted from Class B (See Note
1) 20,206 130,264
---------------------------
Net increase 11,757 $ 80,451
===========================
Year ended October 31, 2006:
Shares sold 130,312 $ 816,002
Shares issued to shareholders in
reinvestment of dividends: 20,298 127,045
Shares redeemed (104,833) (657,034)
---------------------------
Net increase in shares outstanding
before conversion 45,777 286,013
Shares converted from Class B (See Note
1) 175,396 1,096,223
---------------------------
Net increase 221,173 $ 1,382,236
===========================
</Table>
www.mainstayfunds.com 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 8,400 $ 53,824
Shares issued to shareholders in
reinvestment of dividends: 5,964 38,175
Shares redeemed (34,821) (223,015)
---------------------------
Net decrease in shares
outstanding before conversion (20,457) (131,016)
Shares reacquired upon conversion
into Class A (See Note 1) (20,300) (130,264)
---------------------------
Net decrease (40,757) $ (261,280)
===========================
Year ended October 31, 2006:
Shares sold 11,677 $ 72,948
Shares issued to shareholders in
reinvestment of dividends: 9,405 58,592
Shares redeemed (77,176) (480,937)
---------------------------
Net decrease in shares
outstanding before conversion (56,094) (349,397)
Shares reacquired upon conversion
into Class A (See Note 1) (175,959) (1,096,223)
---------------------------
Net decrease (232,053) $ (1,445,620)
===========================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 16,917 $ 108,719
Shares issued to shareholders in
reinvestment of dividends: 2,477 15,849
Shares redeemed (19,461) (124,344)
---------------------------
Net increase (decrease) (67) $ 224
===========================
Year ended October 31, 2006:
Shares sold 17,410 $ 108,663
Shares issued to shareholders in
reinvestment of dividends: 2,611 16,277
Shares redeemed (17,963) (112,127)
---------------------------
Net increase 2,058 $ 12,813
===========================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 58,246 $ 376,386
Shares issued to shareholders in
reinvestment of dividends: 2,405 15,374
Shares redeemed (9,879) (63,562)
---------------------------
Net increase 50,772 $ 328,198
===========================
Year ended October 31, 2006:
Shares sold 8,828 $ 55,402
Shares issued to shareholders in
reinvestment of dividends: 960 6,009
Shares redeemed (2,357) (14,777)
---------------------------
Net increase 7,431 $ 46,634
===========================
</Table>
NOTE 11--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission ("SEC") and the New York State
Attorney General, and, as noted in the notes to the year-end 2004, 2005 and 2006
financial statements of each fund of the Trust, NYLIM was previously a party to
arrangements with certain registered representatives of broker-dealers relating
to the level of trading by clients of those registered representatives in shares
of certain funds of the Trust. All such arrangements were terminated by the
fourth quarter of 2003.
NYLIM and the Trustees of the Trust undertook a review of the possible dilutive
effects that transactions under those arrangements and certain other levels of
trading by Fund shareholders over the period from 1999 to 2003 may have had on
the funds. As a result of this review, in December 2005, NYLIM made payments
totaling $5.882 million to nine MainStay funds. The amount paid to the MainStay
High Yield Corporate Bond Fund was $814,000. NYLIM has reimbursed or paid all
expenses relating to the Board of Trustees' review of this matter.
In a separate matter, in 2004 the SEC raised concerns relating to a guarantee
provided to shareholders of the MainStay Equity Index Fund and the fees and
expenses of that Fund as well as the related guarantee disclosure to that fund's
shareholders. Discussions have been held with the SEC concerning a possible
resolution of this matter. There can be no assurance of the outcome of these
efforts.
NOTE 12--NEW ACCOUNTING PRONOUNCEMENTS:
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation becomes effective for the Fund's 2008 fiscal
year, and is to be applied to all open tax years as of the date of
effectiveness. Based on Management's analysis, the determination has been made
that the adoption of the interpretation on November 1, 2007, did not have an
impact on the Fund's financial statements upon adoption. Management continually
reviews the Fund's tax positions and such conclusions under the Interpretation
based on factors, including, but not limited to, ongoing analyses of tax laws,
regulations and interpretations, thereof.
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measure-
32 MainStay High Yield Corporate Bond Fund
ments." This standard establishes a single authoritative definition of "fair
value", sets out a framework for measuring fair value and requires additional
disclosures about fair value measurements. SFAS No. 157 applies to fair value
measurements already required or permitted by existing standards. SFAS No. 157
is effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. The changes to
current generally accepted accounting principles from the application of this
Statement relate to the definition of fair value, the methods used to measure
fair value, and the expanded disclosures about fair value measurements. As of
October 31, 2007, the Fund does not believe the adoption of SFAS No. 157 will
impact the amounts reported in the Fund's financial statements. However,
additional disclosures may be required about the inputs used to develop the
measurements and the effect of certain measurements reported in the financial
statements for a fiscal period.
www.mainstayfunds.com 33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay High Yield Corporate Bond Fund
("the Fund"), one of the funds constituting The MainStay Funds, as of October
31, 2007, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years or periods in the
four-year period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits. The financial highlights for the periods presented through
October 31, 2003, were audited by other auditors, whose report dated December
18, 2003, expressed an unqualified opinion thereon.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2007, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay High Yield Corporate Bond Fund of The MainStay Funds as of October 31,
2007, the results of its operations for the year then ended, the changes in its
net assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years or periods in the four-year period
then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 20, 2007
34 MainStay High Yield Corporate Bond Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with New York Life Investment Management LLC (the "Manager") and the
Subadvisory Agreement between the Manager and MacKay Shields LLC, a wholly-owned
indirect subsidiary of New York Life Investment Management Holdings LLC, an
affiliate of the Manager, (the "Subadvisor"), (each an "Agreement") at a meeting
held on May 22 and 23, 2007. In connection with the approval of each Agreement,
the Trustees reviewed a significant amount of a wide variety of information that
they had requested and received from the Manager and the Subadvisor, and data
and analysis from an outside data provider and a third party consultant. The
Trustees considered various industry trends and regulatory developments in their
deliberations. In considering approval of each Agreement, and in evaluating the
fairness of the compensation to be paid by the Fund, the Trustees met both as a
full Board and in executive session with no Interested Trustee present, in
advance of the meeting at which the Agreements were approved, and they
considered a number of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and the Subadvisor have provided historically to the Fund, and
also generally to other series of the Trust. Among other services, the Manager's
services have included investment management services, including monitoring and
evaluating the Subadvisor's investment program and investment results with
respect to the Fund, and the Subadvisor's compliance with the Fund's investment
policies and restrictions, and administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets,
and its other services include, among other services, providing reports to the
Manager and reviewing certain aspects of Fund filings. The Trustees considered,
among other things, the Manager's and Subadvisor's management, personnel,
resources, operations and portfolio management capabilities. The Board reviewed
reports on the Subadvisor's brokerage practices, including with respect to best
execution of portfolio trades. The Trustees considered the Manager's supervision
of the Fund's service providers and its attention to the compliance program of
the Trust, the Manager, the Subadvisor and certain other service providers, as
well as the Subadvisor's attention to its compliance program. The Trustees noted
the generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's historical and
continuing outstanding investment performance record when compared over several
time periods with groupings of funds having similar investment mandates.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information that indicated that the profitability to the Manager and its
affiliates from the Management Agreement with respect to the Fund was moderate
to low, and from the overall relationship with the Trust was low. The Trustees
considered other benefits that the Manager and its affiliates receive from the
relationship with the Trust, including benefits that NYLIFE Distributors and
MainStay Shareholder Services receive in exchange for services they provide to
the Funds, and certain benefits from soft dollar arrangements. The Trustees
acknowledged certain benefits to the reputation of the Manager and the Trust
from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees recognized the large asset size of the Fund relative to other
series of the Trust, and discussed the extent to which economies of scale were
projected by the Manager to be realized as the Fund's assets, or the assets of
the Trust overall, increase. The Trustees noted, in particular, the plans of the
Manager and its affiliates for marketing and distributing the shares of the
various series of the Trust. They noted the Manager's willingness to implement
contractual breakpoints, including a new breakpoint, that would reduce the
Fund's management fee at asset levels above each breakpoint, and the fact that
the breakpoints were intended to provide that shareholders would share in
benefits from economies of scale obtained
www.mainstayfunds.com 35
through the growth in the Fund's assets. The Trustees noted that the Fund's
management fee rate had been reduced by the breakpoint schedule applicable to
the Fund. The Trustees reviewed information showing that the Fund's asset size
had decreased based in part on investment trends that appeared to focus more
heavily on other asset classes. The Trustees reviewed information about the
potential effect of asset growth on Fund expenses, the difficulty of forecasting
its effect on the profitability of the Manager and its affiliates, and the
management fee breakpoints applicable to the Fund and certain other funds. The
Trustees considered information about transfer agency expenses and their effect
on the Fund's overall expenses. They considered that, across the Trust (though
not every series or share class), gross transfer agency fees tended to be
relatively high and, therefore, adversely affected gross expense ratios. Noting
that the Trust historically permitted smaller investor accounts, the Trustees
considered measures that had been recently implemented that were intended to
increase the average size of shareholder accounts, including generally higher
investment minimums and small account fees, and the Trustees considered
potential benefits to the Manager and its affiliates arising from such measures.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by the
Fund, the Trustees evaluated factors such as the fees and expenses borne by
other registered funds in the market pursuing strategies generally similar to
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts having investment strategies similar to that
of the Fund, and took account of explanations and other information relating to
the fees and expenses of those other funds and accounts. The Trustees considered
the current and proposed contractual and net management fees, its anticipated
expense ratio, and various components of the expense ratio, in comparison to
other funds in comparison groupings. The Trustees generally acknowledged the
historical relationships among the Manager, the Subadvisor and the Trust and the
likely difficulties in implementing an alternative to the investment management
arrangement between the Trust and the Manager.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings, with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. This summary set out
above describes the most important, but not all, of the factors considered by
the Trustees in considering each Agreement. On the basis of their review, a
majority of the Trustees and a majority of the Non-Interested Trustees concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the judgment of a
majority of the Trustees and a majority of the Non-Interested Trustees that
approval of each Agreement was in the best interests of the Fund and its
shareholders.
36 MainStay High Yield Corporate Bond Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2007,
should be multiplied by 0.1% to arrive at the amount eligible for qualified
dividend income, 63.9% for qualified interest income and 0.7% for the corporate
dividends received deduction.
In January 2008, shareholders will receive on IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2007. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2007.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
or (iii) on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 1-800-MAINSTAY (1-800-624-6782). You also can obtain and review copies
of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC
(information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330).
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of The MainStay Funds (the
"Trust") was held on May 4, 2007, at the offices of New York Life Investment
Management LLC in Parsippany, New Jersey. The purpose of the meeting was to
elect the following individuals to the Board of Trustees of the Trust:
- Susan B. Kerley
- Alan R. Latshaw
- Peter Meenan
- Richard H. Nolan, Jr.
- Richard S. Trutanic
- Roman L. Weil
- John A. Weisser
- Brian A. Murdock (Interested Trustee)
There are no other Trustees of the Trust.
No other business came before the special meeting. The proposal to elect
Trustees was passed by the shareholders of the Fund as shown below:
<Table>
<Caption>
HIGH YIELD
CORPORATE VOTES VOTES
BOND FUND FOR WITHHELD ABSTENTIONS TOTAL
Susan B.
Kerley 447,622,020.041 1,722,768.513 1,036,694.000 450,381,482.554
- ------------------------------------------------------------------------------------
Alan R.
Latshaw 447,693,324.347 1,651,464.207 1,036,694.000 450,381,482.554
- ------------------------------------------------------------------------------------
Peter Meenan 447,681,312.838 1,663,475.716 1,036,694.000 450,381,482.554
- ------------------------------------------------------------------------------------
Richard H.
Nolan, Jr. 447,680,474.394 1,664,314.160 1,036,694.000 450,381,482.554
- ------------------------------------------------------------------------------------
Richard S.
Trutanic 447,688,843.599 1,655,944.955 1,036,694.000 450,381,482.554
- ------------------------------------------------------------------------------------
Roman L. Weil 447,624,656.652 1,720,131.902 1,036,694.000 450,381,482.554
- ------------------------------------------------------------------------------------
John A.
Weisser 447,660,728.079 1,674,060.475 1,036,694.000 450,381,482.554
- ------------------------------------------------------------------------------------
Brian A.
Murdock 447,684,144.192 1,660,644.362 1,036,694.000 450,381,482.554
- ------------------------------------------------------------------------------------
</Table>
This resulted in approval of the proposal.
www.mainstayfunds.com 37
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Pursuant to
notice, a Special Meeting of Shareholders of the Trust was held on May 4, 2007,
at NYLIM's offices in Parsippany, New Jersey. The Trustees listed below were
elected to serve the Trust effective June 7, 2007.
Each Trustee serves until his or her successor is elected and qualified or until
his or her resignation, death or removal. The Retirement Policy provides that a
Trustee shall tender his or her resignation upon reaching age 72. A Trustee
reaching the age of 72 may continue for additional one-year periods with the
approval of the Board's Nominating and Governance Committee, except that no
Trustee shall serve on the Board past his or her 75th birthday. Officers serve a
term of one year and are elected annually by the Trustees. The business address
of each Trustee and officer listed below is 51 Madison Avenue, New York, New
York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF FUNDS
POSITION(S) HELD IN FUND COMPLEX
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
BRIAN A. MURDOCK Indefinite; Member of the Board of Managers 73 Trustee, Eclipse Funds since
3/14/56 Trustee and Chief and President (since 2004) and June, 2007 (3 funds); Director,
Executive Officer Chief Executive Officer (since Eclipse Funds Inc. since June
since 2006 2006), New York Life Investment 2007 (22 funds); Director,
Management LLC and New York MainStay VP Series Fund, Inc.,
Life Investment Management since 2006 (24 portfolios);
Holdings LLC; Senior Vice Director, ICAP Funds, Inc.,
President, New York Life since 2006 (3 funds)
Insurance Company (since 2004);
Chairman of the Board and
President, NYLIFE Distributors
LLC (since 2004); Member of the
Board of Managers, NYLCAP
Manager LLC and Madison Capital
Funding LLC (since 2004),
MacKay Shields LLC and
Institutional Capital LLC
(since 2006), and McMorgan &
Company LLC (since 2007); Chief
Executive Officer, Eclipse
Funds and Eclipse Funds Inc.
(since 2006); Chairman (2006 to
2007) and Director and Chief
Executive Officer (since 2006),
MainStay VP Series Fund, Inc.;
Director and Chief Executive
Officer, ICAP Funds, Inc.
(since 2006); Chief Investment
Officer, MLIM Europe and Asia
(2001 to 2003); President of
Merrill Japan and Chairman of
MLIM's Pacific Region (1999 to
2001)
-----------------------------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow Capital
Management, Inc., McMorgan & Company LLC, NYLIFE Securities Inc. and/or NYLIFE
Distributors LLC, as described in detail above in the column "Principal
Occupation(s) During Past Five Years."
38 MainStay High Yield Corporate Bond Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. KERLEY Indefinite; Partner, Strategic Management 73 Chairman since 2005 and Trustee
8/12/51 Chairman and Advisors LLC (since 1990) since 2000, Eclipse Funds (3
Trustee since funds); Chairman since 2005 and
June 2007 Director since 1990, Eclipse
Funds Inc. (22 funds); Chairman
and Director, ICAP Funds, Inc.,
since 2006 (3 funds); Chairman
and Director, MainStay VP
Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
Legg Mason Partners Funds,
Inc., since 1991 (30
portfolios)
----------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & Young 73 Trustee, Eclipse Funds since
3/27/51 Trustee and Audit LLP (2002 to 2003); Partner, June 2007 (3 funds); Director,
Committee Arthur Andersen LLP (1989 to Eclipse Funds Inc. since June
Financial Expert 2002); Consultant to the Audit 2007 (22 funds); Director, ICAP
since 2006 and Compliance Committee of The Funds, Inc., since June 2007 (3
MainStay Funds (2004 funds); Director, MainStay VP
to 2006) Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
State Farm Associates Funds
Trusts since 2005 (3
portfolios); Trustee, State
Farm Mutual Fund Trust since
2005 (15 portfolios); Trustee,
State Farm Variable Product
Trust since 2005 (9 portfolios)
----------------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds since
12/5/41 Trustee since President and Chief Executive 2002 (3 funds); Director,
June 2007 Officer, Babson-United, Inc. Eclipse Funds Inc. since 2002
(financial services firm) (2000 (22 funds); Director, ICAP
to 2004); Independent Funds, Inc.,
Consultant (1999 to 2000); Head since 2006 (3 funds); Director,
of Global Funds, Citicorp (1995 MainStay VP Series Fund, Inc.,
to 1999) since June 2007 (24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 73 Trustee, Eclipse Funds since
NOLAN, JR. Trustee since Management; President--Shields/ June 2007 (3 funds); Director,
11/16/46 June 2007 Alliance, Alliance Capital Eclipse Funds Inc. since June
Management (1994 to 2004) 2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 2006
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman (since 1990) and Chief 73 Trustee, Eclipse Funds since
TRUTANIC Trustee since Executive Officer (1990 to June 2007 (3 funds); Director,
2/13/52 1994 1999), Somerset Group Eclipse Funds Inc. since June
(financial advisory firm); 2007 (22 funds); Director, ICAP
Managing Director and Advisor, Funds, Inc., since June 2007 (3
The Carlyle Group (private funds); Director, MainStay VP
investment firm) (2002 to Series Fund, Inc., since June
2004); Senior Managing Director 2007 (24 portfolios)
and Partner, Groupe Arnault
S.A. (private investment firm)
(1999
to 2002)
----------------------------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 39
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEE
ROMAN L. WEIL Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds since
5/22/40 Trustee and Audit Accounting, Graduate School of June 2007 (3 funds); Director,
Committee Business, University of Eclipse Funds Inc. since June
Financial Expert Chicago; President, Roman L. 2007 (22 funds); Director, ICAP
since June 2007 Weil Associates, Inc. Funds, Inc., since June 2007 (3
(consulting firm) funds); Director, MainStay VP
Series Fund, Inc., since 1994
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 73 Trustee, Eclipse Funds since
10/22/41 Trustee since Salomon Brothers, Inc. (1971 to June 2007 (3 funds); Director,
June 2007 1995) Eclipse Funds Inc. since June
2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 1997
(24 portfolios); Trustee,
Direxion Funds (69 funds) and
Direxion Insurance Trust (45
funds) since March 2007
----------------------------------------------------------------------------------------------------------------------
</Table>
Terry L. Lierman resigned as Trustee of the Trust effective May 31, 2007. Edward
J. Hogan, John B. McGuckian and Donald E. Nickelson resigned as Trustees of the
Trust effective June 7, 2007.
At a meeting of the Board of Trustees held on June 7 and 8, 2007, the following
individuals were appointed to serve as Officers of the Trust effective June 7,
2007:
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ROBERT A. Chief Legal Senior Managing Director, General Counsel and Secretary, New
ANSELMI Officer since York Life Investment Management LLC (including predecessor
10/19/46 2004 advisory organizations) (since 2000); Secretary (since 2001)
and General Counsel (since 2004), New York Life Investment
Management Holdings LLC; Senior Vice President, New York
Life Insurance Company (since 2000); Vice President and
Secretary, McMorgan & Company LLC (since 2001); Secretary,
NYLIM Service Company LLC (since 2005), NYLCAP Manager LLC
(since 2004), Madison Capital Funding LLC (since 2002), and
Institutional Capital LLC (since 2006); Chief Legal Officer,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), McMorgan Funds (since 2005) and
ICAP Funds, Inc. (since 2006); Managing Director and Senior
Counsel, Lehman Brothers Inc. (1998 to 1999); General
Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998)
-------------------------------------------------------------------------------------------------
JACK R. Treasurer and Managing Director, New York Life Investment Management LLC
BENINTENDE Principal (since June 2007); Treasurer and Principal Financial and
5/12/64 Financial and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
Accounting MainStay VP Series Fund, Inc., and ICAP Funds, Inc. (since
Officer since June 2007); Vice President, Prudential Investments (2000 to
June 2007 2007); Assistant Treasurer, JennisonDryden Family of Funds,
Target Portfolio Trust, The Prudential Series Fund and
American
Skandia Trust (2006 to 2007); Treasurer and Principal
Financial Officer, The Greater China
Fund (2007)
-------------------------------------------------------------------------------------------------
STEPHEN P. President since Senior Managing Director and Chief Marketing Officer, New
FISHER March 2007 York Life Investment Management LLC (since 2005); Managing
2/22/59 Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since March 2007); Managing Director, UBS
Global Asset Management (1999 to 2003)
-------------------------------------------------------------------------------------------------
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration predecessor advisory organizations) (since 2000); Executive
2/8/59 since 2005 Vice President, New York Life Trust Company (since 2006);
Vice President--Administration, Eclipse Funds, Eclipse Funds
Inc. and MainStay VP Series Fund, Inc. (since 2005) and ICAP
Funds, Inc. (since 2006)
-------------------------------------------------------------------------------------------------
</Table>
40 MainStay High Yield Corporate Bond Fund
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Senior Managing Director and Chief Compliance Officer (since
MICUCCI President and 2006) and Managing Director and Chief Compliance Officer
12/16/65 Chief Compliance (2003 to 2006), New York Life Investment Management LLC and
Officer since New York Life Investment Management Holdings LLC; Senior
2006 Managing Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE Distributors
LLC; Chief Compliance Officer, NYLCAP Manager LLC (since
2006); Senior Vice President and Chief Compliance Officer,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund,
Inc., and ICAP Funds, Inc. (since 2006); Vice President--
Compliance, Eclipse Funds, Eclipse Funds Inc. and MainStay
VP Series Fund, Inc. (2004 to 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002)
-------------------------------------------------------------------------------------------------
MARGUERITE E.H. Secretary since Managing Director and Associate General Counsel, New York
MORRISON* 2004 Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC (since
2005); Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP Funds,
Inc. (since 2006); Chief Legal Officer--Mutual Funds and
Vice President and Corporate Counsel, The Prudential
Insurance Company of America (2000 to 2004)
-------------------------------------------------------------------------------------------------
</Table>
* In addition to serving as Secretary to the Trust, effective January 1, 2008,
Marguerite E.H. Morrison will assume the role of Chief Legal Officer to the
Trust.
Arphiela Arizmendi resigned as Treasurer and Principal Financial and Accounting
Officer of the Trust effective June 7, 2007.
Christopher O. Blunt resigned as President of the Trust effective March 12,
2007.
Alan J. Kirshenbaum resigned as Senior Vice President of the Trust effective
March 19, 2007.
www.mainstayfunds.com 41
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay 130/30 Core Fund
MainStay 130/30 Growth Fund
MainStay All Cap Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay 130/30 High Yield Fund(2)
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Institutional Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Principal Preservation Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay 130/30 International Fund
MainStay Global High Income Fund
MainStay ICAP International Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
RETIREMENT FUNDS
MainStay Retirement 2010 Fund
MainStay Retirement 2020 Fund
MainStay Retirement 2030 Fund
MainStay Retirement 2040 Fund
MainStay Retirement 2050 Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
New York, New York
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
Chicago, Illinois
MACKAY SHIELDS LLC(3)
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
MCMORGAN & COMPANY LLC(3)
San Francisco, California
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
(NEW YORK LIFE INVESTMENT MANAGEMENT LLC LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2007 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A011872 (RECYCLE LOGO) MS329-07 MSHY11-12/07
08
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
INTERNATIONAL EQUITY FUND
Message from the President
and
Annual Report
October 31, 2007
MESSAGE FROM
THE PRESIDENT
The 12-month period ended October 31, 2007, was a dynamic one for mutual fund
investors. U.S. equity markets generally advanced, with growth stocks out-
performing value stocks at all capitalization levels. Although past performance
is no guarantee of future results, international stocks as a whole provided even
stronger returns for U.S. investors.
The progress of the equity markets, however, was far from steady. In February,
weakness in Asian markets led to sharp price declines around the globe. The
correction caused many investors to reconsider whether China and other emerging
economies could sustain their rapid growth. Fortunately, strong
corporate-earnings reports and positive economic news helped the stock market
regain its footing.
In July and August, difficulties in the subprime-mortgage market led to another
stock-market correction. A number of high-profile mortgage originators either
closed their doors or were sold to larger entities. Other leading financial
services firms faced major write-offs because of subprime-mortgage exposure.
The Federal Open Market Committee (FOMC) took prompt action to increase
liquidity and stabilize the financial markets by lowering the discount rate and
the federal funds target rate during the reporting period. These Federal Reserve
moves helped calm investor concerns, and the stock market generally advanced
from August 16, 2007, the date of an unscheduled FOMC meeting, through the end
of October 2007.
Difficulties in the subprime-mortgage market led to a "flight to quality," or a
general movement toward fixed-income securities that carry lower risk. As demand
for short- and intermediate-term Treasury securities increased, yields fell
across much of the maturity spectrum. Yields rose, however, on 20-and 30-year
Treasury bonds, and the yield curve steepened during the 12-month reporting
period.
High-yield bonds rallied from November 2006 through May 2007. But in June and
July, the yield differences--or spreads--between high-yield bonds and comparable
Treasury securities began to widen. At the end of October 2007, these spreads
were wider than when the reporting period began, making high-yield securities
more attractive to investors willing to accept higher risk.
To help investors address the challenges of today's ever-changing markets, New
York Life Investment Management LLC provides access to seven institutional
investment boutiques, each with its own proprietary research and investment
culture. As advisors and subadvisors to MainStay Funds, these boutiques bring a
wealth of experience and market insight to our shareholders. The portfolio
managers of each MainStay Fund seek to consistently apply time-tested investment
principles across a wide variety of market environments.
The report that follows provides more specific information about the market
forces and investment decisions that affected your investment in MainStay Funds
from November 1, 2006, through October 31, 2007. Please read the report
carefully. As you do, bear in mind that this annual report reflects just a short
segment of your lifetime investment journey. We look forward to continuing to
work with you, wherever that journey may lead.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
INTERNATIONAL EQUITY FUND
MainStay Funds
Annual Report
October 31, 2007
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 10
- --------------------------------------------------------------------------------
Portfolio of Investments 12
- --------------------------------------------------------------------------------
Financial Statements 17
- --------------------------------------------------------------------------------
Notes to Financial Statements 23
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 32
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 33
- --------------------------------------------------------------------------------
Federal Income Tax Information 35
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 35
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 35
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 35
- --------------------------------------------------------------------------------
Trustees and Officers 36
</Table>
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT
MONTH-END PERFORMANCE INFORMATION, PLEASE CALL 1-800-MAINSTAY (1-800-624-6782)
OR VISIT WWW.MAINSTAYFUNDS.COM.
A REDEMPTION FEE OF 2% WILL BE APPLIED TO SHARES THAT ARE REDEEMED WITHIN 60
DAYS OF PURCHASE. PERFORMANCE DATA SHOWN DOES NOT REFLECT THE DEDUCTION OF THIS
FEE, WHICH WOULD LOWER PERFORMANCE.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ----------------------------------------------------
With sales charges 9.91% 17.24% 8.17%
Excluding sales charges 16.30 18.58 8.78
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/97 9450.00 10000.00
10409.00 10965.00
12678.00 13490.00
11320.00 13099.00
9240.00 9834.00
9356.00 8534.00
11189.00 10842.00
12880.00 12884.00
14606.00 15215.00
18858.00 19402.00
10/31/07 21932.00 24236.00
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ----------------------------------------------------
With sales charges 10.48% 17.48% 8.00%
Excluding sales charges 15.48 17.68 8.00
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/97 10000.00 10000.00
10945.00 10965.00
13226.00 13490.00
11733.00 13099.00
9520.00 9834.00
9563.00 8534.00
11351.00 10842.00
12959.00 12884.00
14590.00 15215.00
18693.00 19402.00
10/31/07 21587.00 24236.00
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ----------------------------------------------------
With sales charges 14.49% 17.67% 7.99%
Excluding sales charges 15.49 17.67 7.99
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/97 10000.00 10000.00
10945.00 10965.00
13226.00 13490.00
11733.00 13099.00
9509.00 9834.00
9563.00 8534.00
11352.00 10842.00
12959.00 12884.00
14579.00 15215.00
18682.00 19402.00
10/31/07 21577.00 24236.00
</Table>
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect maximum applicable sales charges explained in this paragraph, change in
share price, and reinvestment of dividend and capital-gain distributions. The
graphs assume an initial investment of $10,000 and reflect the deduction of all
sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase and have an annual 12b-1 fee of 1.00%.
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee and are generally available to corporate and institutional investors
with a minimum initial investment of $5 million. Class R1 shares are sold with
no initial sales charge or CDSC, and have no annual 12b-1 fee. Class R2 shares
are sold with no initial sales charge or CDSC, and have an annual 12b-1 fee of
..25%. Class R1 and R2 shares are available only through corporate-sponsored
retirement programs, which include certain minimum program requirements.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT TWO PAGES ARE AN INTEGRAL PART OF THE
TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ----------------------------------------------------
16.96% 19.16% 9.12%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/97 10000.00 10000.00
11036.00 10965.00
13458.00 13490.00
12039.00 13099.00
9831.00 9834.00
9968.00 8534.00
11946.00 10842.00
13823.00 12884.00
15756.00 15215.00
20473.00 19402.00
10/31/07 23945.00 24236.00
</Table>
CLASS R1 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ----------------------------------------------------
16.88% 18.97% 8.97%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/97 10000.00 10000.00
11015.00 10965.00
13423.00 13490.00
11995.00 13099.00
9783.00 9834.00
9909.00 8534.00
11867.00 10842.00
13712.00 12884.00
15572.00 15215.00
20206.00 19402.00
10/31/07 23618.00 24236.00
</Table>
CLASS R2 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ----------------------------------------------------
16.49% 18.75% 8.75%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/97 10000.00 10000.00
10989.00 10965.00
13364.00 13490.00
11915.00 13099.00
9703.00 9834.00
9799.00 8534.00
11703.00 10842.00
13506.00 12884.00
15333.00 15215.00
19861.00 19402.00
10/31/07 23136.00 24236.00
</Table>
Class R3 shares are sold with no initial sales charge or CDSC, have an annual
12b-1 fee of .50%, and are available in certain individual retirement accounts
or in certain retirement plans. Performance figures reflect certain fee waivers
and/or expense limitations, without which total returns may have been lower.
These fee waivers and/or expense limitations are contractual and may be modified
or terminated only with the approval of the Board of Trustees. The Manager may
recoup the amount of certain management fee waivers or expense reimbursements
from the Fund pursuant to the contract if such action does not cause the Fund to
exceed existing expense limitations and the recoupment is made within three
years after the year in which the Manager incurred the expense. Prior to 9/1/98
(for Class C), 1/2/04 (for Class I, R1 and R2) and 4/28/06 (for Class R3),
performance for Class C, I, R1, R2 and R3 shares includes the historical
performance of Class B shares adjusted to reflect the applicable sales charge
(or CDSC), fees, estimated expenses and fee waivers/expense limitations of Class
C, I, R1, R2, and R3 shares upon initial offer. Unadjusted, the performance
shown for the newer classes of shares might have been lower.
THE DISCLOSURE ON THE PRECEDING PAGE AND THE FOOTNOTES ON THE NEXT PAGE ARE AN
INTEGRAL PART OF THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN
CONJUNCTION WITH THEM.
6 MainStay International Equity Fund
CLASS R3 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
16.35% 18.27% 8.49%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/97 10000.00 10000.00
10989.00 10965.00
13332.00 13490.00
11875.00 13099.00
9674.00 9834.00
9756.00 8534.00
11627.00 10842.00
13327.00 12884.00
15064.00 15215.00
19408.00 19402.00
10/31/07 22580.00 24236.00
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- ------------------------------------------------------------------------
MSCI EAFE Index(2) 24.91% 23.21% 9.26%
Average Lipper international multi-cap core
fund(3) 27.22 22.56 9.81
</Table>
1. Performance figures shown reflect nonrecurring reimbursements from affiliates
for professional fees and losses attributable to shareholder trading
arrangements. If these nonrecurring reimbursements had not been made the
total return (excluding sales charges) would have been 18.55% for Class A,
17.63% for Class B, 17.65% for Class C, 19.15% for Class I, 18.93% for Class
R1 and 18.71% for Class R2 for the five-year period ended October 31, 2007,
and 8.77% for Class A, 7.98% for Class B, 7.98% for Class C, 9.12% for Class
I, 8.96% for Class R1 and 8.73% for Class R2 for the ten-year period then
ended. Class R3 shares were not affected because the reimbursement occurred
prior to the launch of the share class.
2. The Morgan Stanley Capital International Europe, Australasia and Far East
Index--the MSCI EAFE(R) Index--is an unmanaged index that is considered to be
representative of the international stock market. Results assume reinvestment
of all income and capital gains. The MSCI EAFE(R) Index is considered to be
the Fund's broad-based securities-market index for comparison purposes. An
investment cannot be made directly in an index.
3. Lipper Inc. is an independent monitor of fund performance. Results are based
on total returns with all dividend and capital-gain distributions reinvested.
THE DISCLOSURE ON THE TWO PRECEDING PAGES IS AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 7
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2007, to October 31, 2007,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1,
2007, to October 31, 2007.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six-months ended October 31, 2007. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/07 10/31/07 PERIOD(1) 10/31/07 PERIOD(1)
CLASS A SHARES $1,000.00 $1,018.90 $ 8.04 $1,017.10 $ 8.03
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,014.65 $11.93 $1,013.25 $11.93
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,015.35 $11.84 $1,013.35 $11.82
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,021.45 $ 5.25 $1,019.85 $ 5.24
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,021.05 $ 5.76 $1,019.35 $ 5.75
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,019.30 $ 7.02 $1,018.10 $ 7.02
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R3 SHARES $1,000.00 $1,018.85 $ 8.29 $1,016.85 $ 8.29
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's net annualized expense ratio of each class
(1.58% for Class A, 2.35% for Class B, 2.33% for Class C, 1.03% for Class I,
1.13% for Class R1, 1.38% for Class R2 and 1.63% for Class R3) multiplied by
the average account value over the period, divided by 365 and multiplied by
184 (to reflect the one-half year period).
8 MainStay International Equity Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2007
(COMPOSITION PIE CHART)
<Table>
Common Stocks 93.00
Short-Term Investments (collateral from securities lending 11.20
is 10.2%)
Warrants 2.70
Purchased Put Options 0.00*
Written Call Options (0.30)
Liabilities in Excess of Cash and Other Assets (6.60)
</Table>
* Less than one-tenth of a percent.
See Portfolio of Investments on page 12 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2007 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Tesco PLC
2. MediaSet S.p.A.
3. Reed Elsevier N.V.
4. TNT N.V.
5. Snam Rete Gas S.p.A.
6. Nestle S.A. Registered
7. Diageo PLC(+)
8. Roche Holding AG Genusscheine
9. Hannover Rueckversicherung AG
10. BP PLC
</Table>
+ Security trades on more than one exchange.
www.mainstayfunds.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Rupal J. Bhansali of MacKay Shields LLC
HOW DID MAINSTAY INTERNATIONAL EQUITY FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2007?
Excluding all sales charges, MainStay International Equity Fund returned 16.30%
for Class A shares, 15.48% for Class B shares and 15.49% for Class C shares for
the 12 months ended October 31, 2007. Over the same period, the Fund's Class I
shares returned 16.96%, Class R1 shares returned 16.88%, Class R2 shares
returned 16.49% and Class R3 shares returned 16.35%. All share classes
underperformed the 27.22% return of the average Lipper(1) international
multi-cap core fund and the 24.91% return of the MSCI EAFE(R) Index(2) for the
12 months ended October 31, 2007. The MSCI EAFE(R) Index is the Fund's
broad-based securities-market index. See page 5 for Fund returns with sales
charges.
WHAT FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE?
We remained focused on the analysis of individual business models and sought to
invest in quality companies. Our bottom-up security selection process is based
on reasonable valuations rather than market perceptions. During the reporting
period, this approach pointed the Fund to companies in the transportation, media
and technology hardware & equipment industry groups and away from companies in
capital goods, materials and banks.
DURING THE REPORTING PERIOD, WHICH INDUSTRY GROUPS WERE THE STRONGEST
CONTRIBUTORS TO THE FUND'S RELATIVE PERFORMANCE AND WHICH INDUSTRY GROUPS WERE
WEAK CONTRIBUTORS?
Banks and diversified financials made the largest contribution to the Fund's
relative performance during the reporting period because of security selection
and underweight allocations. Toward the end of the reporting period, the
financials sector as a whole declined, as credit issues in the mortgage market
became more apparent. The retailing industry group was also a strong contributor
to the Fund's performance. Esprit, a Hong Kong-based global clothing retailer,
performed well as its growth prospects in Europe improved.
Exposure to the technology hardware & equipment industry group detracted from
the Fund's relative results, primarily because of an overweight position in
Ericsson, a Sweden-based wireless equipment company. Late in the reporting
period, Ericsson warned that earnings would miss target levels, and the
company's share price declined.
DURING THE REPORTING PERIOD, WHICH INDIVIDUAL FUND HOLDINGS DID PARTICULARLY
WELL AND WHICH HOLDINGS WERE WEAK?
Ryanair, a low-cost airline headquartered in Ireland, was among the strongest
positive contributors to the Fund's performance. The company raised fares and
ancillary revenues to offset high jet-fuel prices. Tesco, the U.K.'s largest
food retailer, saw its shares advance on better-than-anticipated progress in the
company's U.S. expansion. Nestle, the world's largest food manufacturer, saw its
major restructuring efforts begin to bear fruit with expanding profit margins
and growing revenues.
The Fund's weakest holding during the reporting period was Italian media company
MediaSet, which has been highly profitable but underperformed when weakness in
the Italian advertising market led to earnings downgrades. The Fund continues to
hold the stock. Another weak holding was Ireland-based C&C Group, a major
beverage company with a unique franchise in the cider industry. The company's
stock declined after the company missed earnings expectations following a wet
and cool summer. Wireless equipment supplier Ericsson also detracted from Fund
results.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
We established new positions in Japan's NTT DoCoMo and Italy's Telecom Italia as
the outlook for cash flow and earnings in the telecommunication services sector
improved. When Puma's share price dropped we found the valuations compelling and
increased the Fund's position.
We sold stocks that we felt had reached their intrinsic value and had become
stretched on a valuation basis. Japanese pharmaceutical company Takeda
Pharmaceutical, Canadian software company Cognos and U.K.-based Royal Bank of
Scotland all fit this description. We also eliminated the Fund's position in
HongKong Electric in advance of a
Foreign securities may be subject to greater risks than U.S. investments,
including currency fluctuations, less-liquid trading markets, greater price
volatility, political and economic instability, less publicly available
information, and changes in tax or currency laws or monetary policy. These risks
are likely to be greater in emerging markets than in developed markets. The Fund
may invest in derivatives, which may increase the volatility of the Fund's net
asset value and may result in a loss to the Fund. The Fund may experience a
portfolio turnover rate of more than 100% and may generate taxable short-term
capital gains.
1. See footnote on page 7 for more information on Lipper Inc.
2. See footnote on page 7 for more information on the MSCI EAFE(R) Index.
10 MainStay International Equity Fund
challenging regulatory review set for the end of 2007.
HOW WAS THE FUND POSITIONED RELATIVE TO THE MSCI EAFE(R) INDEX AT THE END OF THE
REPORTING PERIOD?
As of October 31, 2007, the Fund held significantly overweight positions
relative to the MSCI EAFE(R) Index in transportation, technology hardware &
equipment, media and food & staples retailing and a more modestly overweight
position in health care. On the same date, the Fund was underweight relative to
the Index in banks, capital goods and materials. The Fund held market-weight
positions in utilities and energy. The overweight position in media and a lack
of exposure to materials hurt the Fund's relative results during the reporting
period.
During the reporting period, we found fewer compelling investment opportunities
in Japan than we did in Europe and the rest of Asia. As a result, the Fund
maintained its underweight position in Japan.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecast made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
www.mainstayfunds.com 11
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2007
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (93.0%)+
- --------------------------------------------------------------------------------
BELGIUM (1.0%)
Barco N.V. (electronic
equipment & instruments) 25,600 $ 2,104,081
Fortis N.V. (diversified
financial services) 215,000 6,870,328
------------
8,974,409
------------
BRAZIL (0.4%)
Gol Linhas Aereas Inteligentes S.A., ADR
(airlines) (a)(b) 112,500 3,080,250
Tam S.A., ADR (airlines) (a)(b) 15,900 469,050
------------
3,549,300
------------
CANADA (0.9%)
Loblaw Cos., Ltd. (food & staples retailing) (b) 178,700 8,283,780
------------
DENMARK (0.2%)
William Demant Holding (health care equipment &
supplies) (b)(c) 15,600 1,429,524
------------
FINLAND (0.8%)
TietoEnator Oyj (IT Services) (b) 316,230 7,755,209
------------
FRANCE (3.9%)
BNP Paribas S.A. (commercial banks) 50,180 5,530,848
M6-Metropole Television (media) (b) 175,020 5,182,056
Sanofi-Aventis, ADR (pharmaceuticals) (a)(b) 53,300 2,345,733
Societe Television Francaise 1 (media) 363,900 10,062,861
Total S.A. (oil, gas & consumable fuels) 154,600 12,462,585
------------
35,584,083
------------
GERMANY (8.4%)
AWD Holding A.G. (capital markets) (b) 83,395 2,762,738
Bayerische Motoren Werke A.G. (automobiles) 190,338 12,746,263
V Hannover Rueckversicherung A.G. (insurance) (b) 488,932 25,815,437
MLP A.G. (capital markets) (b) 213,693 2,832,337
Puma A.G. Rudolf Dassler Sport (textiles, apparel
& luxury goods) 53,730 23,031,629
Rational A.G. (household durables) 6,400 1,483,315
Rheinmetall A.G.
(industrial conglomerates) 63,112 5,624,213
Siemens A.G.
(industrial conglomerates) 22,100 3,000,254
------------
77,296,186
------------
</Table>
<Table>
<Caption>
SHARES VALUE
GREECE (2.8%)
Hellenic Telecommunications Organization S.A.
(diversified
telecommunication services) 28,900 $ 1,057,462
OPAP S.A. (hotels,
restaurants & leisure) 604,948 24,711,587
------------
25,769,049
------------
HONG KONG (0.8%)
Alibaba.com, Ltd. (IT Services) (d) 10,200 17,767
Esprit Holdings, Ltd. (specialty retail) 274,000 4,525,273
Yue Yuen Industrial Holdings, Ltd. (textiles,
apparel & luxury goods) 905,500 2,774,830
------------
7,317,870
------------
INDIA (0.1%)
Infosys Technologies, Ltd., Sponsored ADR (IT
Services) (a) 18,000 916,920
------------
IRELAND (2.0%)
Bank of Ireland (commercial banks) 735,200 13,578,418
C&C Group PLC (beverages) 559,232 4,495,919
------------
18,074,337
------------
ITALY (12.4%)
Assicurazioni Generali S.p.A. (insurance) 214,050 10,173,138
Enel S.p.A. (electric utilities) 1,429,600 17,115,551
ENI S.p.A. (oil, gas & consumable fuels) (b) 237,300 8,662,271
Fondiaria-Sai S.p.A. (insurance) 18,700 907,173
V MediaSet S.p.A. (media) 3,494,810 36,196,210
V Snam Rete Gas S.p.A. (gas utilities) (b) 4,741,581 30,667,483
Telecom Italia S.p.A. (diversified
telecommunication services) 2,949,100 7,621,103
Terna S.p.A. (electric utilities) 900,000 3,523,236
------------
114,866,165
------------
JAPAN (9.0%)
ASKUL Corp. (internet & catalog retail) (b) 63,600 1,601,508
Canon, Inc. (office electronics) 326,550 16,275,842
FamilyMart Co., Ltd. (food &
staples retailing) 71,900 2,094,084
Hoya Pentax HD Corp. (electronic equipment &
instruments) 98,700 3,567,625
Keyence Corp. (electronic
equipment & instruments) 14,900 3,418,741
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. One of
the ten largest holdings may be a security traded on more than one exchange.
May be subject to change daily.
12 MainStay International Equity Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
JAPAN (CONTINUED)
Mabuchi Motor Co., Ltd. (electronic equipment &
instruments) 7,000 $ 470,853
MISUMI Group, Inc. (trading companies &
distributors) (b) 281,500 4,731,318
Nippon Television Network Corp. (media) 17,000 2,186,798
Nitto Denko Corp. (chemicals) 44,100 2,136,861
NTT DoCoMo, Inc. (wireless telecommunication
services) 7,343 10,565,926
OBIC Co., Ltd. (IT Services) 37,820 7,563,017
Otsuka Corp. (IT Services) 28,200 2,691,302
RICOH Co., Ltd. (office electronics) 686,400 13,416,825
Ryohin Keikaku Co., Ltd.
(multiline retail) 176,300 11,064,118
Tokyo Gas Co., Ltd. (gas utilities) 245,500 1,087,423
------------
82,872,241
------------
NETHERLANDS (8.6%)
ING Groep N.V. (diversified
financial services) 214,000 9,622,080
Randstad Holdings N.V. (commercial services &
supplies) (b) 155,371 8,610,897
V Reed Elsevier N.V. (media) 1,599,570 30,932,713
V TNT N.V. (air freight & logistics) 750,746 30,710,806
------------
79,876,496
------------
SINGAPORE (1.2%)
DBS Group Holdings, Ltd.
(commercial banks) 414,000 6,409,732
Venture Corp., Ltd. (electronic equipment &
instruments) 516,300 4,960,306
------------
11,370,038
------------
SPAIN (2.9%)
Antena 3 de Television S.A. (media) 496,624 8,805,269
Banco Popular Espanol S.A. (commercial banks) 840,970 14,679,154
Indra Sistemas S.A. (IT Services) 129,266 3,750,583
------------
27,235,006
------------
SWEDEN (4.0%)
Assa Abloy AB Class B
(building products) 278,400 5,829,173
Svenska Handelsbanken Class A (commercial banks) 187,900 6,226,801
Telefonaktiebolaget LM Ericsson Class B
(communications equipment) 5,834,800 17,452,822
Telefonaktiebolaget LM Ericsson, Sponsored ADR
(communications
equipment) (a) 242,700 7,293,135
------------
36,801,931
------------
</Table>
<Table>
<Caption>
SHARES VALUE
SWITZERLAND (11.9%)
Geberit A.G. (building products) 16,237 $ 2,188,014
Logitech International S.A. Registered (computers
& peripherals) (c) 398,227 14,065,378
V Nestle S.A. Registered (food products) 64,610 29,811,848
Novartis A.G. Registered (pharmaceuticals) 221,548 11,781,213
Novartis A.G., ADR (pharmaceuticals) (a) 199,100 10,586,147
V Roche Holding A.G. Genusscheine
(pharmaceuticals) 162,225 27,672,358
Swiss Reinsurance Registered (insurance) 76,800 7,206,630
Temenos Group A.G. (software) (c) 42,203 1,174,937
UBS A.G. (capital markets) 83,400 4,477,746
UBS A.G. Registered (capital markets) 22,300 1,192,580
------------
110,156,851
------------
UNITED KINGDOM (19.2%)
V BP PLC, Sponsored ADR (oil, gas & consumable
fuels) (a) 323,233 25,208,942
Burberry Group PLC (textiles, apparel & luxury
goods) 72,800 930,944
Cobham PLC (aerospace & defense) 569,400 2,492,222
V Diageo PLC (beverages) 1,053,261 24,090,502
Diageo PLC, Sponsored ADR (beverages) (a) 47,216 4,332,068
Friends Provident PLC (insurance) 1,027,600 3,931,507
Lloyds TSB Group PLC
(commercial banks) 1,838,700 20,855,605
Lloyds TSB Group PLC, Sponsored ADR (commercial
banks) (a)(b) 52,910 2,419,045
Man Group PLC (capital markets) 44,400 542,847
Provident Financial PLC
(consumer finance) 463,598 8,497,301
Rolls-Royce Group PLC (aerospace & defense) (c) 950,799 10,636,240
Rolls-Royce Group PLC--Class B (aerospace &
defense) (d) 38,412,279 79,871
Royal Dutch Shell PLC Class A, ADR (oil, gas &
consumable fuels) (a)(b) 80,100 7,009,551
V Tesco PLC (food & staples retailing) 4,675,735 47,444,608
Ultra Electronics Holdings
(aerospace & defense) 54,182 1,410,511
Vodafone Group PLC, ADR (wireless
telecommunication services) (a) 459,024 18,025,873
------------
177,907,637
------------
UNITED STATES (2.5%)
Aflac, Inc. (insurance) 365,802 22,965,050
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
UNITED STATES (CONTINUED)
Synthes, Inc. (health care
equipment & supplies) 3,880 $ 484,330
------------
23,449,380
------------
Total Common Stocks
(Cost $715,674,595) 859,486,412
------------
<Caption>
NUMBER OF
CONTRACTS VALUE
PURCHASED PUT OPTIONS (0.0%)++
- --------------------------------------------------------------------------------
FRANCE (0.0%)++
BNP Paribas S.A.
Strike Price $70.00
Expire 11/16/07 (commercial banks) 214 11,780
------------
ITALY (0.0%)++
Assicurazioni Generali S.p.A.
Strike Price $28.00
Expire 11/16/07 (insurance) 1,225 3,123
------------
NETHERLANDS (0.0%)++
ING Groep N.V.
Strike Price $29.00
Expire 11/16/07 (diversified financial services) 523 11,364
Strike Price $28.00
Expire 11/16/07 (diversified financial services) 520 7,532
------------
18,896
------------
SWITZERLAND (0.0%)++
Swiss Reinsurance Registered
Strike Price $96.00
Expire 11/16/07 (insurance) 2,560 1,547
------------
Total Purchased Put Options
(Cost $324,387) 35,346
------------
<Caption>
NUMBER OF
WARRANTS
WARRANTS (2.7%)
- --------------------------------------------------------------------------------
IRELAND (2.7%)
Ryanair Holdings PLC
Strike Price E0.000001
Expire 3/21/08 (airlines) (c)(e) 2,917,432 24,785,761
------------
Total Warrants
(Cost $14,012,372) 24,785,761
------------
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (11.2%)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (1.0%)
UNITED STATES (1.0%)
Deutsche Bank Financial LLC
4.77%, due 11/1/07 (banks) $ 9,535,000 $ 9,535,000
------------
Total Commercial Paper
(Cost $9,535,000) 9,535,000
------------
<Caption>
SHARES
INVESTMENT COMPANY (10.2%)
UNITED STATES (10.2%)
State Street Navigator Securities Lending Prime
Portfolio (banks) (f) 94,092,291 94,092,291
------------
Total Investment Company
(Cost $94,092,291) 94,092,291
------------
Total Short-Term Investments
(Cost $103,627,291) 103,627,291
------------
Total Investments
(Cost $833,638,645) 106.9% 987,934,810(g)
Liabilities in Excess of
Cash and Other Assets (6.9) (63,659,157)
------------- ------------
Net Assets 100.0% $924,275,653
============= ============
<Caption>
NUMBER OF
CONTRACTS VALUE
WRITTEN CALL OPTIONS (-0.3%)
- --------------------------------------------------------------------------------
FRANCE (0.0%)++
BNP Paribas S.A.
Strike Price $80.00
Expire 11/16/07 (commercial banks) (214) $ (20,769)
------------
Total S.A.
Strike Price $60.00
Expire 11/16/07 (oil, gas & consumable fuels) (232) (1,680)
------------
(22,449)
------------
GERMANY (0.0%)++
Bayerische Motoren Werke AG
Strike Price $50.00
Expire 11/16/07 (automobiles) (366) (6,892)
Strike Price $47.00
Expire 11/16/07 (automobiles) (377) (40,958)
------------
(47,850)
------------
</Table>
14 MainStay International Equity Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
NUMBER OF
CONTRACTS VALUE
WRITTEN CALL OPTIONS (CONTINUED)
- --------------------------------------------------------------------------------
ITALY (0.0%)++
Assicurazioni Generali S.p.A.
Strike Price $32.00
Expire 11/16/07 (insurance) (1,225) $ (191,466)
Strike Price $37.00
Expire 1/18/08 (insurance) (507) (16,054)
Snam Rete Gas S.p.A.
Strike Price $4.60
Expire 11/16/07 (gas utilities) (369) (9,407)
Strike Price $4.80
Expire 12/21/07 (gas utilities) (364) (9,069)
------------
(225,996)
------------
NETHERLANDS (0.0%)++
ING Groep N.V.
Strike Price $33.00
Expire 11/16/07 (diversified financial services) (523) (7,576)
Strike Price $32.00
Expire 11/16/07 (diversified financial services) (520) (18,831)
------------
(26,407)
------------
SWEDEN (0.0%)++
Svenska Handelsbanken Class A
Strike Price $220.00
Expire 11/16/07 (commercial banks) (747) (4,704)
------------
SWITZERLAND (-0.1%)
Logitech International S.A. Registered
Strike Price $30.00
Expire 11/17/07 (computers & peripherals) (798) (438,900)
Strike Price $35.00
Expire 12/22/07 (computers & peripherals) (1,604) (344,860)
Nestle S.A. Registered
Strike Price $560.00
Expire 11/16/07 (food products) (500) (3,410)
Strike Price $580.00
Expire 1/18/08 (food products) (560) (16,534)
Swiss Reinsurance Registered
Strike Price $105.00
Expire 11/16/07 (insurance) (2,560) (104,088)
------------
(907,792)
------------
</Table>
<Table>
<Caption>
NUMBER OF
CONTRACTS VALUE
UNITED KINGDOM (-0.1%)
BP PLC, Sponsored ADR
Strike Price $75.00
Expire 1/19/08 (oil, gas & consumable fuels) (a) (416) $ (220,480)
Strike Price $85.00
Expire 1/19/08 (oil, gas & consumable fuels) (a) (301) (30,100)
Diageo PLC
Strike Price $1,150.00
Expire 11/16/07 (beverages) (105) (6,550)
Strike Price $1,200.00
Expire 12/21/07 (beverages) (136) (12,725)
Lloyds TSB Group PLC
Strike Price $580.00
Expire 11/16/07 (commercial banks) (208) (8,650)
Tesco PLC
Strike Price $480.00
Expire 11/16/07 (food & staples retailing) (243) (75,790)
Strike Price $52.00
Expire 12/21/07 (food & staples retailing) (975) (141,912)
Strike Price $520.00
Expire 1/18/08 (food & staples retailing) (234) (49,873)
Vodafone Group PLC, ADR
Strike Price $37.50
Expire 11/17/07 (wireless telecommunication
services) (a) (638) (153,120)
Strike Price $40.00
Expire 11/17/07 (wireless telecommunication
services) (a) (630) (40,950)
Strike Price $40.00
Expire 1/19/08 (wireless telecommunication
services) (a) (310) (58,900)
------------
(799,050)
------------
UNITED STATES (-0.1%)
AFLAC, Inc.
Strike Price $60.00
Expire 1/19/08 (insurance) (527) (258,230)
Strike Price $65.00
Expire 1/19/08 (insurance) (397) (79,400)
------------
(337,630)
------------
Total Written Call Options
(Premium Received $917,434) $ (2,371,878)
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
++ Less than one-tenth of a percent.
+++ All of the Fund's assets are maintained to cover "senior
securities transactions" which may include, but are not
limited to, forwards, TBA's, options and futures. These
securities are marked-to-market daily and reviewed against
the value of the Fund's "senior securities" holdings to
ensure proper coverage for these transactions.
(a) ADR--American Depositary Receipt.
(b) Represents a security, or a portion thereof, which is out on
loan. The aggregate market value of such securities is
$89,260,161; cash collateral of $94,092,291 (included in
liabilities) was received with which the Fund purchased
highly liquid short-term investments.
(c) Non-income producing security.
(d) Fair valued security. The total market value of the security
at October 31, 2007 is $97,638, which reflects less than
0.1% of the Fund's net assets.
(e) May be sold to institutional investors only under Rule 144a
or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(f) Represents a security, or a portion thereof, purchased with
cash collateral received for securities on loan.
(g) At October 31, 2007, cost is $837,174,881 for federal income
tax purposes and net unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 165,123,866
Gross unrealized depreciation (14,363,937)
-------------------
Net unrealized appreciation $ 150,759,929
===================
</Table>
<Table>
The following abbreviations are used in the above portfolio:
E--Euro
</Table>
The table below sets forth the diversification of MainStay International Equity
Fund investments by industry.
INDUSTRY DIVERSIFICATION
<Table>
<Caption>
VALUE PERCENT+
Aerospace & Defense $ 14,618,844 1.6%
Air Freight & Logistics 30,710,806 3.3
Airlines 28,335,061 3.1
Automobiles 12,746,263 1.4
Banks 103,627,291 11.2
Beverages 32,918,489 3.6
Building Products 8,017,187 0.9
Capital Markets 11,808,248 1.3
Chemicals 2,136,861 0.2
Commercial Banks 69,711,383 7.5
Commercial Services & Supplies 8,610,897 0.9
Communications Equipment 24,745,957 2.7
Computers & Peripherals 14,065,378 1.5
Consumer Finance 8,497,301 0.9
Diversified Financial Services 16,511,304 1.8
Diversified Telecommunication Services 8,678,565 0.9
Electric Utilities 20,638,787 2.2
Electronic Equipment & Instruments 14,521,606 1.6
Food & Staples Retailing 57,822,473 6.3
Food Products 29,811,848 3.2
Gas Utilities 31,754,906 3.4
Health Care Equipment & Supplies 1,913,854 0.2
Hotels, Restaurants & Leisure 24,711,587 2.7
Household Durables 1,483,315 0.2
Industrial Conglomerates 8,624,467 0.9
Insurance 71,003,605 7.7
Internet & Catalog Retail 1,601,508 0.2
IT Services 22,694,798 2.5
Media 93,365,907 10.1
Multiline Retail 11,064,118 1.2
Office Electronics 29,692,667 3.2
Oil, Gas & Consumable Fuels 53,343,349 5.7
Pharmaceuticals 52,385,451 5.7
Software 1,174,937 0.1
Specialty Retail 4,525,273 0.5
Textiles, Apparel & Luxury Goods 26,737,403 2.9
Trading Companies & Distributors 4,731,318 0.5
Wireless Telecommunication Services 28,591,798 3.1
------------ ----------
987,934,810 106.9
Liabilities in Excess of Cash and Other Assets (63,659,157) (6.9)
------------ ----------
Net Assets $924,275,653 100.0%
============ ==========
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
</Table>
16 MainStay International Equity Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2007
<Table>
ASSETS:
Investment in securities, at value
(identified cost $833,638,645) including
$89,260,161 market value of securities
loaned $ 987,934,810
Cash denominated in foreign currencies
(identified cost $23,612,260) 24,862,520
Cash 22,715
Receivables:
Investment securities sold 14,942,891
Dividends and interest 2,496,940
Fund shares sold 561,469
Premium on written options 160,428
Other assets 26,052
Unrealized appreciation on foreign currency
forward contracts 1,052,043
--------------
Total assets 1,032,059,868
--------------
LIABILITIES:
Securities lending collateral 94,092,291
Written options, at value (premiums received
$917,434) 2,371,878
Payables:
Investment securities purchased 6,094,202
Manager (See Note 3) 680,705
Fund shares redeemed 593,508
Transfer agent (See Note 3) 175,397
NYLIFE Distributors (See Note 3) 132,714
Shareholder communication 101,144
Custodian 100,735
Professional fees 40,024
Trustees 10,531
Accrued expenses 8,365
Unrealized depreciation on foreign currency
forward contracts 3,382,721
--------------
Total liabilities 107,784,215
--------------
Net assets $ 924,275,653
==============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding
(par value of $.01 per share) unlimited
number of shares authorized $ 511,856
Additional paid-in capital 682,654,347
--------------
683,166,203
Accumulated undistributed net investment
income 7,704,101
Accumulated undistributed net realized gain
on investments and foreign currency
transactions 81,577,170
Net unrealized appreciation on investments
and written options $ 152,841,721
Net unrealized depreciation on translation
of other assets and liabilities in foreign
currencies and foreign currency forward
contracts (1,013,542)
--------------
Net assets $ 924,275,653
==============
CLASS A
Net assets applicable to outstanding shares $ 186,738,205
==============
Shares of beneficial interest outstanding 10,320,203
==============
Net asset value per share outstanding $ 18.09
Maximum sales charge (5.50% of offering
price) 1.05
--------------
Maximum offering price per share outstanding $ 19.14
==============
CLASS B
Net assets applicable to outstanding shares $ 76,081,192
==============
Shares of beneficial interest outstanding 4,477,375
==============
Net asset value and offering price per share
outstanding $ 16.99
==============
CLASS C
Net assets applicable to outstanding shares $ 25,677,033
==============
Shares of beneficial interest outstanding 1,511,936
==============
Net asset value and offering price per share
outstanding $ 16.98
==============
CLASS I
Net assets applicable to outstanding shares $ 631,205,964
==============
Shares of beneficial interest outstanding 34,623,885
==============
Net asset value and offering price per share
outstanding $ 18.23
==============
CLASS R1
Net assets applicable to outstanding shares $ 4,158,168
==============
Shares of beneficial interest outstanding 229,351
==============
Net asset value and offering price per share
outstanding $ 18.13
==============
CLASS R2
Net assets applicable to outstanding shares $ 358,163
==============
Shares of beneficial interest outstanding 19,748
==============
Net asset value and offering price per share
outstanding $ 18.14
==============
CLASS R3
Net assets applicable to outstanding shares $ 56,928
==============
Shares of beneficial interest outstanding 3,146
==============
Net asset value and offering price per share
outstanding $ 18.10
==============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 17
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2007
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 23,110,606
Income from securities loaned--net 860,344
Interest 217,669
-------------
Total income 24,188,619
-------------
EXPENSES:
Manager (See Note 3) 7,496,336
Transfer agent--Classes A, B and C (See Note
3) 839,921
Transfer agent--Classes I, R1, R2 and R3
(See Note 3) 135,365
Distribution--Class B (See Note 3) 562,674
Distribution--Class C (See Note 3) 170,961
Distribution--Class R3 (See Note 3) 73
Distribution/Service--Class A (See Note 3) 438,625
Service--Class B (See Note 3) 187,557
Service--Class C (See Note 3) 56,986
Distribution/Service--Class R2 (See Note 3) 828
Distribution/Service--Class R3 (See Note 3) 73
Custodian 367,478
Shareholder communication 168,954
Professional fees 158,023
Recordkeeping 111,917
Registration 98,257
Trustees 46,477
Shareholder service--Class R1 (See Note 3) 4,101
Shareholder service--Class R2 (See Note 3) 331
Shareholder service--Class R3 (See Note 3) 29
Miscellaneous 44,573
-------------
Total expenses before recoupment 10,889,539
Net recouped fees (See Note 3) 176,299
-------------
Net expenses 11,065,838
-------------
Net investment income 13,122,781
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FOREIGN
CURRENCY TRANSACTIONS AND WRITTEN OPTIONS:
Net realized gain (loss) on:
Security transactions $ 83,189,488
Written option transactions 866,994
Foreign currency transactions (8,163,249)
-------------
Net realized gain on investments, foreign
currency transactions and written option
transactions 75,893,233
-------------
Net change in unrealized appreciation
(depreciation) on:
Security transactions 39,767,134
Written option contracts (1,454,444)
Translation of other assets and liabilities
in foreign currencies and foreign currency
forward contracts 401,168
-------------
Net change in unrealized appreciation on
investments, foreign currency transactions
and written option transactions 38,713,858
-------------
Net realized and unrealized gain on
investments, foreign currency transactions
and written option transactions 114,607,091
-------------
Net increase in net assets resulting from
operations $127,729,872
=============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$2,376,068.
18 MainStay International Equity Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2007 AND OCTOBER 31, 2006
<Table>
<Caption>
2007 2006
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 13,122,781 $ 11,172,191
Net realized gain on investments,
foreign currency transactions and
written option transactions 75,893,233 47,557,337
Net increase from payments from
Manager for losses attributable
to shareholder trading
arrangements (See Note 3(B) on
page 26.) -- 772,000
Net change in unrealized
appreciation (depreciation) on
investments, foreign currency
transactions and written option
transactions 38,713,858 84,112,240
----------------------------
Net increase in net assets
resulting from operations 127,729,872 143,613,768
----------------------------
Dividends and distributions to shareholders:
From net investment income:
Class A (695,182) (290,676)
Class I (4,859,067) (1,466,906)
Class R1 (34,454) (26,140)
Class R2 (2,755) (1,818)
Class R3 (56) --
----------------------------
(5,591,514) (1,785,540)
----------------------------
From net realized gain on investments:
Class A (9,929,084) (3,820,332)
Class B (4,875,985) (4,019,174)
Class C (1,282,100) (517,420)
Class I (35,093,105) (6,453,914)
Class R1 (257,357) (141,124)
Class R2 (27,504) (18,053)
Class R3 (732) --
----------------------------
(51,465,867) (14,970,017)
----------------------------
Total dividends and distributions
to shareholders (57,057,381) (16,755,557)
----------------------------
</Table>
<Table>
<Caption>
2007 2006
Capital share transactions:
Net proceeds from sale of shares $221,836,609 $ 417,067,683
Net asset value of shares issued
to shareholders in reinvestment
of dividends and distributions 46,704,468 14,320,707
Cost of shares redeemed+ (169,504,999) (130,278,448)
Net asset value of shares converted (See Note
1):
Class A 7,792,316 33,509,731
Class B (7,792,316) (33,509,731)
----------------------------
Increase in net assets derived
from capital share transactions 99,036,078 301,109,942
----------------------------
Net increase in net assets 169,708,569 427,968,153
NET ASSETS:
Beginning of year 754,567,084 326,598,931
----------------------------
End of year $924,275,653 $ 754,567,084
============================
Accumulated undistributed net
investment income at end of year $ 7,704,101 $ 6,845,067
============================
</Table>
+ Cost of shares redeemed net of redemption fee of $20,373 and $12,195 for the
years ended October 31, 2007 and 2006, respectively.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
-------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of period $ 16.69 $ 13.53 $ 11.95 $ 10.50 $ 8.73 $ 9.11
-------- --------- ------- ------- ----------- ------------
Net investment income (loss) (a) 0.22 0.24 0.15 0.07 0.08 (0.00)(b)
Net realized and unrealized gain (loss) on
investments 2.54 3.65(e) 1.59 1.48 1.63 (0.43)
Net realized and unrealized gain (loss) on
foreign currency transactions (0.17) (0.10) (0.14) 0.03 0.04 0.05
-------- --------- ------- ------- ----------- ------------
Total from investment operations 2.59 3.79 1.60 1.58 1.75 (0.38)
-------- --------- ------- ------- ----------- ------------
Less dividends and distributions:
From net investment income (0.07) (0.04) (0.02) (0.13) -- --
From net realized gain on investments (1.12) (0.59) -- -- -- --
-------- --------- ------- ------- ----------- ------------
Total dividends and distributions (1.19) (0.63) (0.02) (0.13) -- --
-------- --------- ------- ------- ----------- ------------
Redemption fee (a) 0.00(b) 0.00(b) 0.00(b) 0.00(b) 0.02 --
-------- --------- ------- ------- ----------- ------------
Net asset value at end of period $ 18.09 $ 16.69 $ 13.53 $ 11.95 $ 10.50 $ 8.73
======== ========= ======= ======= =========== ============
Total investment return (c) 16.30% 29.11%(d)(e) 13.40% 15.11% 20.27%(f) (4.17%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 1.25% 1.65% 1.15% 0.60% 0.99%+ (0.05%)
Net expenses 1.58% 1.62% 1.74% 1.90% 2.27%+ 2.26%
Expenses (before
recoupment/waiver/reimbursement) 1.55% 1.67%(d) 1.76% -- -- --
Portfolio turnover rate 49% 50% 51% 54% 71% 102%
Net assets at end of period (in 000's) $186,738 $ 145,964 $87,204 $70,252 $43,747 $ 30,084
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of period $ 15.77 $ 12.87 $ 11.44 $10.09 $ 8.44 $ 8.87
------- ---------- ------- ------ ----------- ------------
Net investment income (loss) (a) 0.09 0.13 0.05 (0.02) 0.02 (0.08)
Net realized and unrealized gain (loss) on
investments 2.40 3.45(e) 1.52 1.41 1.57 (0.40)
Net realized and unrealized gain (loss) on
foreign currency transactions (0.16) (0.09) (0.14) 0.03 0.04 0.05
------- ---------- ------- ------ ----------- ------------
Total from investment operations 2.33 3.49 1.43 1.42 1.63 (0.43)
------- ---------- ------- ------ ----------- ------------
Less dividends and distributions:
From net investment income -- -- -- (0.07) -- --
From net realized gain on investments (1.12) (0.59) -- -- -- --
------- ---------- ------- ------ ----------- ------------
Total dividends and distributions (1.12) (0.59) -- (0.07) -- --
------- ---------- ------- ------ ----------- ------------
Redemption fee (a) 0.00(b) 0.00(b) 0.00(b) 0.00(b) 0.02 --
------- ---------- ------- ------ ----------- ------------
Net asset value at end of period $ 16.98 $ 15.77 $ 12.87 $11.44 $ 10.09 $ 8.44
======= ========== ======= ====== =========== ============
Total investment return (c) 15.49% 28.15%(d)(e) 12.50% 14.16% 19.55%(f) (4.85%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.53% 0.91% 0.40% (0.15%) 0.24%+ (0.80%)
Net expenses 2.33% 2.37% 2.49% 2.65% 3.02%+ 3.01%
Expenses (before
recoupment/waiver/reimbursement) 2.30% 2.42%(d) 2.51% -- -- --
Portfolio turnover rate 49% 50% 51% 54% 71% 102%
Net assets at end of period (in 000's) $25,677 $ 17,026 $11,600 $6,718 $ 2,715 $ 1,284
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ Annualized.
(a) Per share date based on average shares outstanding during the period.
(b) Less than one cent per share.
(c) Total return is calculated exclusive of sales charges. Classes I, R1, R2 and R3 are not
subject to sales charges.
(d) Includes nonrecurring reimbursements from Manager for professional fees. The effect on
total return was less than one hundredth of a percent.
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses were $0.02 per share on net
realized gains on investments and the effect on total investment return was less than
0.01%, respectively.
(f) Total return is not annualized.
</Table>
20 MainStay International Equity Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
-------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
$ 15.78 $ 12.88 $ 11.44 $ 10.09 $ 8.44 $ 8.88
------- --------- ------- ------- ----------- ------------
0.09 0.15 0.05 (0.02) 0.02 (0.08)
2.40 3.43(e) 1.53 1.41 1.57 (0.41)
(0.16) (0.09) (0.14) 0.03 0.04 0.05
------- --------- ------- ------- ----------- ------------
2.33 3.49 1.44 1.42 1.63 (0.44)
------- --------- ------- ------- ----------- ------------
-- -- -- (0.07) -- --
(1.12) (0.59) -- -- -- --
------- --------- ------- ------- ----------- ------------
(1.12) (0.59) -- (0.07) -- --
------- --------- ------- ------- ----------- ------------
0.00(b) 0.00(b) 0.00(b) 0.00(b) 0.02 --
------- --------- ------- ------- ----------- ------------
$ 16.99 $ 15.78 $ 12.88 $ 11.44 $ 10.09 $ 8.44
======= ========= ======= ======= =========== ============
15.48% 28.13%(d)(e) 12.59% 14.16% 19.55%(f) (4.95%)
0.52% 1.11% 0.40% (0.15%) 0.24%+ (0.80%)
2.35% 2.37% 2.49% 2.65% 3.02%+ 3.01%
2.30% 2.41%(d) 2.51% -- -- --
49% 50% 51% 54% 71% 102%
$76,081 $ 67,150 $88,410 $69,882 $56,490 $46,779
</Table>
<Table>
<Caption>
CLASS I
---------------------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2007 2006 2005 2004
$ 16.79 $ 13.60 $ 12.02 $ 11.40
-------- ---------- -------- -----------
0.31 0.33 0.23 0.12
2.56 3.66(e) 1.59 0.49
(0.16) (0.10) (0.14) 0.01
-------- ---------- -------- -----------
2.71 3.89 1.68 0.62
-------- ---------- -------- -----------
(0.15) (0.11) (0.10) --
(1.12) (0.59) -- --
-------- ---------- -------- -----------
(1.27) (0.70) (0.10) --
-------- ---------- -------- -----------
0.00(b) 0.00(b) 0.00(b) 0.00(b)
-------- ---------- -------- -----------
$ 18.23 $ 16.79 $ 13.60 $ 12.02
======== ========== ======== ===========
16.96% 29.94%(d)(e) 13.98% 5.44%(f)
1.80% 2.22% 1.72% 1.33%+
1.03% 1.01% 1.17% 1.17%+
1.02% 1.08%(d) 1.19%
49% 50% 51% 54%
$631,206 $ 520,233 $135,643 $39,266
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 21
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R1
---------------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2007 2006 2005 2004
Net asset value at beginning of period $16.71 $13.54 $12.00 $11.40
------ ------ ------ -----------
Net investment income (a) 0.29 0.32 0.22 0.12
Net realized and unrealized gain on investments 2.55 3.64(e) 1.54 0.47
Net realized and unrealized gain (loss) on foreign
currency transactions (0.16) (0.10) (0.14) 0.01
------ ------ ------ -----------
Total from investment operations 2.68 3.86 1.62 0.60
------ ------ ------ -----------
Less dividends and distributions:
From net investment income (0.14) (0.10) (0.08) --
From net realized gain on investments (1.12) (0.59) -- --
------ ------ ------ -----------
Total dividends and distributions (1.26) (0.69) (0.08) --
------ ------ ------ -----------
Redemption fee (a) 0.00(b) 0.00(b) 0.00(b) 0.00(b)
------ ------ ------ -----------
Net asset value at end of period $18.13 $16.71 $13.54 $12.00
====== ====== ====== ===========
Total investment return (c) 16.88% 29.76%(d)(e) 13.57% 5.26%(f)
Ratios (to average net assets)/Supplemental Data:
Net investment income 1.68% 2.19% 1.62% 1.23% +
Net expenses 1.13% 1.12% 1.27% 1.27% +
Expenses (before recoupment/waiver/reimbursement) 1.12% 1.17%(d) 1.29% --
Portfolio turnover rate 49% 50% 51% 54%
Net assets at end of period (in 000's) $4,158 $3,893 $3,325 $ 1
</Table>
<Table>
<Caption>
CLASS R2 CLASS R3
--------------------------------------------------- -----------------------
JANUARY 2, APRIL 28,
2004** 2006**
THROUGH THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, OCTOBER 31,
2007 2006 2005 2004 2007 2006
Net asset value at beginning of period $16.72 $13.55 $11.99 $11.40 $16.70 $15.26
------ ------ ------ ----------- ------ -----------
Net investment income (a) 0.24 0.31 0.19 0.09 0.13 0.13
Net realized and unrealized gain on
investments 2.57 3.62(e) 1.57 0.49 2.64 1.35(e)
Net realized and unrealized gain (loss) on
foreign currency transactions (0.16) (0.10) (0.14) 0.01 (0.17) (0.04)
------ ------ ------ ----------- ------ -----------
Total from investment operations 2.65 3.83 1.62 0.59 2.60 1.44
------ ------ ------ ----------- ------ -----------
Less dividends and distributions:
From net investment income (0.11) (0.07) (0.06) -- (0.08) --
From net realized gain on investments (1.12) (0.59) -- -- (1.12) --
------ ------ ------ ----------- ------ -----------
Total dividends and distributions (1.23) (0.66) (0.06) -- (1.20) --
------ ------ ------ ----------- ------ -----------
Redemption fee (a) 0.00(b) 0.00(b) 0.00(b) 0.00(b) 0.00(b) 0.00(b)
------ ------ ------ ----------- ------ -----------
Net asset value at end of period $18.14 $16.72 $13.55 $11.99 $18.10 $16.70
====== ====== ====== =========== ====== ===========
Total investment return (c) 16.49% 29.53%(d)(e) 13.52% 5.18%(f) 16.35% 9.44%(f)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.38% 2.07% 1.37% 0.98%+ 0.76% 1.60%+
Net expenses 1.38% 1.37% 1.52% 1.52%+ 1.63% 1.59%+
Expenses (before
recoupment/waiver/reimbursement) 1.37% 1.42%(d) 1.54% -- 1.62% 1.70%(d)+
Portfolio turnover rate 49% 50% 51% 54% 49% 50%
Net assets at end of period (in 000's) $ 358 $ 289 $ 416 $ 1 $ 57 $ 11
</Table>
<Table>
** Commencement of operations.
+ Annualized.
(a) Per share date based on average shares outstanding during the period.
(b) Less than one cent per share.
(c) Total return is calculated exclusive of sales charges. Classes I, R1, R2 and R3 are not
subject to sales charges.
(d) Includes nonrecurring reimbursements from Manager for professional fees. The effect on
total return was less than one hundredth of a percent.
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses were $0.02 per share on net
realized gains on investments and the effect on total investment return was less than
0.01%, respectively.
(f) Total return is not annualized.
</Table>
22 MainStay International Equity Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises nineteen funds (collectively referred to as the
"Funds"). These financial statements and notes relate only to MainStay
International Equity Fund (the "Fund"), a diversified fund.
The Fund currently offers seven classes of shares. Class A shares commenced on
January 3, 1995. Class B shares commenced on September 13, 1994. Class C shares
commenced on September 1, 1998. Class I shares, Class R1 shares and Class R2
shares commenced on January 2, 2004. Class R3 shares commenced on April 28,
2006. Class A shares are offered at net asset value per share plus an initial
sales charge. No sales charge applies on investments of $1 million or more (and
certain other qualified purchases) in Class A shares, but a contingent deferred
sales charge is imposed on certain redemptions of such shares within one year of
the date of purchase. Class B shares and Class C shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within up to six years of purchase of Class B
shares and a 1% contingent deferred sales charge may be imposed on redemptions
made within one year of purchase of Class C shares. Class I, Class R1, Class R2
and Class R3 shares are not subject to a sales charge. As approved by the Board
of Trustees in 1997, Class B shares convert to Class A shares eight years after
the date they were purchased. The seven classes of shares bear the same voting
(except for issues that relate solely to one class), dividend, liquidation and
other rights and conditions except that Class B and Class C shares are subject
to higher distribution fee rates than Class A, Class R2 and Class R3 shares
under a distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I and
Class R1 shares are not subject to a distribution or service fee. Class R1,
Class R2 and Class R3 shares are authorized to pay to New York Life Investment
Management LLC, its affiliates, or third-party service providers, as
compensation for services rendered to shareholders of Class R1, Class R2 or
Class R3 shares, a shareholder service fee.
The Fund's investment objective is to provide long-term growth of capital
commensurate with an acceptable level of risk by investing in a portfolio
consisting primarily of non-U.S. equity securities. Current income is a
secondary objective.
The Fund invests in foreign securities, which carry certain risks that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country, industry or region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). Securities that are not traded on the valuation date are
valued at the mean of the latest quoted bid and asked prices. Prices normally
are taken from the principal market in which each security trades. Options
contracts are valued at the last posted settlement price on the market where
such options are principally traded. Investments in mutual funds are valued at
their net asset value as of the close of the New York Stock Exchange on the date
of valuation. Foreign currency forward contracts are valued at their fair market
values determined on the basis of the mean between the last current bid and ask
prices based on dealer or exchange quotations.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: a security the trading for which has been
halted or suspended; a debt security that has recently gone into default and for
which there is not a current market quotation; a security of an issuer that has
entered into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; a security
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
where the trading on that security's principal market is temporarily closed at a
time when, under normal conditions, it would be open. At October 31, 2007, the
Fund held securities with a value of $97,638 that were valued in such a manner.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. These events may include, but are not limited to, situations
relating to a single issue in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. Should the
Manager or Subadvisor, as defined in Note 3, conclude that such events may have
effected the accuracy of the last price reported on the local foreign market,
the Manager or Subadvisor may, pursuant to procedures adopted by the Fund,
adjust the value of the local price to reflect the impact on the price of such
securities as a result of such events. Additionally, international equity
securities are also fair valued whenever the movement of a particular index
exceeds certain thresholds. In such cases, the securities are fair valued by
applying factors provided by a third party vendor in accordance with the Fund's
policies and procedures.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
of net investment income and distributions of net realized capital and currency
gains, if any, annually. All dividends and distributions are reinvested in
shares of the Fund, at net asset value, unless the shareholder elects otherwise.
Dividends and distributions to shareholders are determined in accordance with
federal income tax regulations and may differ from generally accepted accounting
principles in the United States of America. Permanent book/tax differences
relating to income and gains are reclassified amongst undistributed net
investment income, accumulated net realized gain or loss and paid-in-capital.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities
purchased, other than short-term securities, for the Fund are accreted and
amortized, respectively, on the constant yield method over the life of the
respective securities or, in the case of a callable security, over the period to
the first date of call. Discounts and premiums on short-term securities are
accreted and amortized, respectively, on the straight line method. Income from
payment-in-kind securities is recorded daily based on the effective interest
method of accrual.
The investment income and realized and unrealized gains and losses on
investments of the Fund are allocated to separate classes of shares based upon
their relative net assets on the date the income is earned or realized and
unrealized gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (C) on
page 26) are allocated to separate classes of shares pro rata based upon their
relative net assets value on the date the expenses are incurred. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. Premiums are received
and are recorded as liabilities. The liabilities are subsequently adjusted and
unrealized appreciation or depreciation is recorded to reflect the current value
of the options written. Premiums received from writing options which expire are
treated as realized gains. Premiums received from writing options which are
exercised or are canceled in closing purchase transactions are added to the
proceeds or netted against the amount paid on the transaction to determine the
realized gain or loss. By writing a covered call option, in exchange for the
premium, the Fund foregoes the opportunity for capital appreciation above the
exercise price should the price of the underlying security or foreign currency
increase. By writing a covered put option, the Fund, in exchange for the
premium, accepts the risk of a decline in the market value of the underlying
security or foreign currency below the exercise price. A call option may be
covered by the call writer's owning the underlying security throughout the
option period. A call option may
24 MainStay International Equity Fund
also be covered by the call writer's maintaining liquid assets valued at greater
than the exercise price of the call written. When writing a covered call option,
the Fund, in return for the premium on the option, gives up the opportunity to
profit from a price increase in the underlying securities above the exercise
price, but, as long as the obligation as the writer continues, has retained the
risk of loss should the price of the underlying security decline. After writing
a put option, the Fund may incur a loss equal to the difference between the
exercise price of the option and the sum of the market value of the underlying
security plus the premium received from the sale of the option.
The Fund may purchase call and put options on its portfolio securities. The Fund
may purchase call options to protect against an increase in the price of the
security it anticipates purchasing. The Fund may purchase put options on its
securities to protect against a decline in the value of the security or to close
out covered written put positions. The Fund may also purchase options to seek to
enhance returns. Risks may arise from an imperfect correlation between the
change in market value of the securities held by the Fund and the prices of
options relating to the securities purchased or sold by the Fund and from the
possible lack of a liquid secondary market for an option. The maximum exposure
to loss for any purchased option is limited to the premium initially paid for
the option. (See Note 5 on page 28.)
(H) FOREIGN CURRENCY FORWARD CONTRACTS. A foreign currency forward contract is
an agreement to buy or sell currencies of different countries on a specified
future date at a specified rate. During the period the forward contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" such contract on a daily basis to reflect the
market value of the contract at the end of each day's trading. When the forward
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Fund's basis in the contract. The Fund enters into foreign currency forward
contracts primarily to hedge its foreign currency denominated investments and
receivables and payables against adverse movements in future foreign exchange
rates or to try to enhance the Fund's returns.
The use of foreign currency forward contracts involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities. The contract amount reflects the extent of the Fund's
involvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. The
unrealized appreciation on forward contracts reflects the Fund's exposure at
period end to credit loss in the event of a counterparty's failure to perform
its obligations. (See Note 5 on page 28.)
(I) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Prices of securities denominated in foreign currency amounts
are translated into U.S. dollars at the mean between the buying and selling
rates last quoted by any major U.S. bank at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date,
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities are presented at the exchange rates and market values
at the close of the period. The realized and unrealized changes in net assets
arising from fluctuations in exchange rates and market prices of securities are
not separately presented.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains or losses
realized as a result of differences between the amounts of securities sale
proceeds or purchase cost, dividends, interest and withholding taxes as recorded
on the Fund's books, and the U.S. dollar equivalent amount actually received or
paid. Net currency gains or losses from valuing such foreign currency
denominated assets and liabilities, other than investments at valuation date
exchange rates, are reflected in unrealized foreign exchange gains or losses.
(J) SECURITIES LENDING. In order to realize additional income the Fund may lend
its securities to broker-dealers and financial institutions. The loans are
collateralized by cash or securities at least equal at all times to the market
value of the securities loaned. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. The Fund may bear
the risk of delay in recovery of, or loss of rights in, the securities loaned
should the borrower of the securities experience financial difficulty. The Fund
receives compensation for lending its securities in the form of fees or it
retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(K) REDEMPTION FEE. The Fund imposes a 2.00% redemption fee on redemptions
(including exchanges) of Fund shares made within 60 days of their date of
purchase for any class. The redemption fee is designed to offset brokerage
commissions and other costs associated with short-term trading and is not
assessed on shares acquired through the reinvestment of dividends or
distributions paid by the Fund. The redemption fees are included in the
Statement of Changes in Net Assets' shares redeemed amount and retained by the
Fund.
www.mainstayfunds.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(L) INDEMNIFICATIONS. In the normal course of business, the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote.
However, there can be no assurance that material liabilities related to such
obligations will not arise in the future which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager") a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. NYLIM provides offices and conducts clerical, recordkeeping and
bookkeeping services, and is responsible for the financial and accounting
records required to be maintained by the Fund. NYLIM also pays the salaries and
expenses of all personnel affiliated with the Fund and all the operational
expenses that are not the responsibility of the Fund. MacKay Shields LLC (the
"Subadvisor"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life, serves as subadvisor to the Fund and is responsible
for the day-to-day portfolio management of the Fund. Pursuant to the terms of a
Subadvisory Agreement between NYLIM and the Subadvisor, NYLIM pays for the
services of the Subadvisor.
The Fund is contractually obligated to pay NYLIM a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.90% on assets up to $500 million and 0.85% on assets in
excess of $500 million.
Effective March 1, 2007, NYLIM has entered into a written expense limitation
agreement under which it has agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses (total annual operating expenses
excluding taxes, interest, litigation, extraordinary expenses, and brokerage and
other transaction expenses relating to the purchase or sale of portfolio
investments) do not exceed the following amounts of average daily net assets for
each class: Class A, 1.60%; Class B, 2.35%; Class C, 2.35%; Class I, 1.03%;
Class R1, 1.13%; Class R2, 1.38% and Class R3, 1.63%. This expense limitation
may be modified or terminated only with the approval of the Board of Trustees.
NYLIM may recoup the amount of any management fee waivers or expense
reimbursements from the Fund pursuant to the agreement if such action does not
cause the Fund to exceed existing expense limitations and the recoupment is made
within three years after the year in which NYLIM incurred the expense.
For the year ended October 31, 2007, NYLIM earned fees from the Fund in the
amount of $7,496,336 and recouped $176,299.
As of October 31, 2007, the amounts of waived fees that are subject to possible
recoupment by NYLIM, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2009 TOTAL
$183,002 $183,002
-------------------------------------------
</Table>
Prior to March 1, 2007, NYLIM had an agreement in place under which it had
agreed to waive a portion of the Fund's management fee or reimburse the expenses
of the Fund so that the Fund's total ordinary operating expenses did not exceed
1.60% of the Fund's average daily net assets for its Class A shares. NYLIM also
applied an equivalent waiver or reimbursement, in an equal amount of basis
points, to the other share classes of the Fund.
State Street Bank & Trust Company ("SSBT"), One Lincoln Street, Boston,
Massachusetts, 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with NYLIM. These services include calculating
daily net asset values of the Fund, maintaining general ledger and sub-ledger
accounts for the calculation of the Fund's respective net asset values, and
assisting NYLIM in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, SSBT is compensated by
NYLIM.
(B) PAYMENTS FROM AFFILIATES. NYLIM reimbursed or paid all expenses relating to
the Board of Trustees' review of certain shareholder trading matters as
described below in the footnote relating to "Other Matters." (See Note 10 on
page 31.)
The total costs associated with the Board of Trustees' review were approximately
$849,975 and included payments to certain third party service providers.
The amount that was reimbursed to the Fund was $23,939. Additional payments were
made by affiliates relating to the shareholder trading matters. Further
discussion regarding these payments by affiliates can be found below in the
footnote relating to "Other Matters."
(C) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has a Distribution Agreement with NYLIFE Distributors LLC (the
"Distributor"), an indirect wholly-owned subsidiary of New York Life. The Fund,
with respect to Class A, Class B, Class C, Class R2 and Class R3 shares, has
adopted
26 MainStay International Equity Fund
distribution plans (the "Plans") in accordance with the provisions of Rule 12b-1
under the 1940 Act.
Pursuant to the Class A and Class R2 Plans, the Distributor receives a monthly
distribution fee from the Fund at an annual rate of 0.25% of the average daily
net assets of the Fund's Class A and Class R2 shares, which is an expense of the
Class A and Class R2 shares of the Fund for distribution or service activities
as designated by the Distributor. Pursuant to the Class B and Class C Plans, the
Fund pays the Distributor a monthly distribution fee, which is an expense of the
Class B and Class C shares of the Fund, at the annual rate of 0.75% of the
average daily net assets of the Fund's Class B and Class C shares. The Plans
provide that the Class B and Class C shares of the Fund also incur a service fee
at the annual rate of 0.25% of the average daily net asset value of the Class B
and Class C shares of the Fund. Pursuant to the Class R3 Plan, the Distributor
receives a monthly distribution fee from the Fund at the annual rate of 0.50% of
the average daily net assets of the Fund's Class R3 shares, which is an expense
of the Class R3 shares of the Fund for distribution or service activities as
designated by the Distributor. Class I and Class R1 shares are not subject to a
distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
In accordance with the Shareholder Services Plans for the Class R1, Class R2 and
Class R3 shares, the Manager has agreed to provide, through its affiliates or
independent third parties, various shareholder and administrative support
services to shareholders of the Class R1, Class R2 and Class R3 shares. For its
services, the Manager is entitled to a Shareholder Service Fee accrued daily and
paid monthly at an annual rate of 0.10% of the average daily net assets
attributable to the Class R1, Class R2 and Class R3 shares.
(D) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $94,608 for the year ended
October 31, 2007. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $5,046, $89,141 and $9,777, respectively, for the year ended October
31, 2007.
(E) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund, for the year ended October 31, 2007,
amounted to $975,286.
(F) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts, effective March 1, 2007. Shareholders with an account
balance of less than $1,000 are charged an annual per account fee of $20
(assessed semi-annually).
(G) CAPITAL. At October 31, 2007, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $ 279 0.0*%
- -----------------------------------------------------------------
Class C 182 0.0*
- -----------------------------------------------------------------
Class I 101,060,689 16.0
- -----------------------------------------------------------------
Class R1 1,813 0.0*
- -----------------------------------------------------------------
Class R2 1,802 0.5
- -----------------------------------------------------------------
Class R3 12,732 22.4
- -----------------------------------------------------------------
</Table>
* Less than one tenth of a percent.
(H) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2007, these fees, which are included in professional fees
shown on the Statement of Operations, were $32,381.
The Fund pays the Manager a monthly fee for certain pricing and recordkeeping
services provided under the Accounting Agreement at the annual rate of 1/20 of
1% for the first $20 million of average monthly net assets, 1/30 of 1% of the
next $80 million of average monthly net assets and 1/100 of 1% of any amount in
excess of $100 million of average monthly net assets. Fees for these services
provided to the Fund by the Manager amounted to $111,917 for the year ended
October 31, 2007.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2007, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$29,405,542 $61,173,269 $ -- $150,530,639 $241,109,450
-----------------------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals and straddle loss deferrals.
www.mainstayfunds.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated net realized
gain on investments, arising from permanent differences; net assets at October
31, 2007 are not affected.
<Table>
<Caption>
ACCUMULATED
ACCUMULATED UNDISTRIBUTED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT GAIN (LOSS) ADDITIONAL
INCOME (LOSS) ON INVESTMENTS PAID-IN CAPITAL
$ (6,672,233) $6,672,233 $--
-------------------------------------------------
</Table>
The reclassifications for the Fund is primarily due to foreign currency gain
(loss), tax adjustments on PFIC's sold and reclassification of distributions.
The tax character of distributions paid during the years ended October 31, 2007
and October 31, 2006, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2007 2006
Distributions paid from:
Ordinary Income $20,206,341 $ 3,637,724
Long-term Capital Gains 36,851,040 13,117,833
- ----------------------------------------------------------------
$57,057,381 $16,755,557
- ----------------------------------------------------------------
</Table>
NOTE 5--WRITTEN OPTIONS AND FOREIGN CURRENCY FORWARD CONTRACTS:
During the year ended October 31, 2007, the Fund had the following transactions
in written call options:
<Table>
<Caption>
NUMBER OF
CONTRACTS PREMIUM
Options Outstanding at October
31, 2006 -- $ --
- --------------------------------------------------------
Options--Written 376,826 1,784,428
- --------------------------------------------------------
Options--Expired (360,240) (866,994)
- --------------------------------------------------------
Options--Closed -- --
- --------------------------------------------------------
Options Outstanding at October
31, 2007 16,586 $ 917,434
- --------------------------------------------------------
</Table>
Foreign Currency Forward Contracts held at October 31, 2007:
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
PURCHASED SOLD (DEPRECIATION)
Foreign Currency Buy Contracts:
- -----------------------------------------------------------------------------------------------------------------------------
Australian Dollar vs. U.S. Dollar, expiring 11/28/07 A$ 4,006,116 $ 3,275,000 $ 435,397
- -----------------------------------------------------------------------------------------------------------------------------
Pound Sterling vs. U.S. Dollar, expiring 2/15/08 L 6,678,463 $ 13,550,000 275,044
- -----------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
CONTRACT CONTRACT
AMOUNT AMOUNT
SOLD PURCHASED
Foreign Cross Currency Sale Contracts:
- -----------------------------------------------------------------------------------------------------------------------------
Canadian Dollar vs. Australian Dollar, expiring 1/18/08 C$ 8,250,000 A$ 9,731,643 290,096
- -----------------------------------------------------------------------------------------------------------------------------
Euro vs. Japanese Yen, expiring 11/14/07 E 16,800,000 Y 2,787,346,800 (127,830)
- -----------------------------------------------------------------------------------------------------------------------------
Euro vs. Japanese Yen, expiring 3/25/08 E 28,804,000 Y 4,602,015,080 (1,178,492)
- -----------------------------------------------------------------------------------------------------------------------------
Singapore Dollar vs. Norwegian Krone, expiring 12/14/07 S$ 3,353,000 NK 12,798,443 51,506
- -----------------------------------------------------------------------------------------------------------------------------
Swedish Krona vs. Japanese Yen, expiring 3/10/08 KR 152,500,000 Y 2,533,375,750 (1,725,540)
- -----------------------------------------------------------------------------------------------------------------------------
Swiss Franc vs. Japanese Yen, expiring 4/11/08 CF 55,485,000 Y 5,432,536,350 (350,859)
- -----------------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation on foreign currency forward
contracts $ (2,330,678)
- -----------------------------------------------------------------------------------------------------------------------------
</Table>
28 MainStay International Equity Fund
Foreign Currency held at October 31, 2007:
<Table>
<Caption>
CURRENCY COST VALUE
Australian Dollar A$ 7,758,359 $ 6,373,149 $ 7,226,136
- --------------------------------------------------------------------------------------------------
Canadian Dollar C$ 31,898 31,979 33,767
- --------------------------------------------------------------------------------------------------
Euro E 1,205,440 1,726,824 1,746,140
- --------------------------------------------------------------------------------------------------
Hong Kong Dollar HK 17,384,641 2,242,889 2,243,107
- --------------------------------------------------------------------------------------------------
Japanese Yen Y 314,270,936 2,672,145 2,724,145
- --------------------------------------------------------------------------------------------------
Norwegian Krone NK 1,833,002 283,979 341,545
- --------------------------------------------------------------------------------------------------
Pound Sterling L 841,248 1,707,062 1,749,206
- --------------------------------------------------------------------------------------------------
Singapore Dollar SGD 1,726,697 1,140,114 1,193,459
- --------------------------------------------------------------------------------------------------
Swedish Krona KR 28,314,372 4,312,111 4,457,517
- --------------------------------------------------------------------------------------------------
Swiss Franc CF 3,646,062 3,122,008 3,147,498
- --------------------------------------------------------------------------------------------------
$23,612,260 $24,862,520
- --------------------------------------------------------------------------------------------------
</Table>
NOTE 6--CUSTODIAN:
SSBT is the custodian of cash and securities of the Fund. Custodial fees are
charged to the Fund based on the market value of securities in the Fund and the
number of certain cash transactions incurred by the Fund.
NOTE 7--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. These funds pay a commitment fee, at an annual rate of .060% of the
average commitment amount, regardless of usage, to The Bank of New York, which
acts as agent to the syndicate. Such commitment fees are allocated among the
funds based upon net assets and other factors. Interest on any revolving credit
loan is charged based upon the Federal Funds Advances rate. There were no
borrowings made or outstanding on the line of credit during the year ended
October 31, 2007.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2007, purchases and sales of securities, other
than short-term securities, were $435,543 and $396,078, respectively.
NOTE 9--CAPITAL SHARE TRANSACTIONS
(IN 000'S):
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 3,279 $ 56,381
Shares issued to shareholders in
reinvestment of dividends and
distributions 603 9,868
Shares redeemed (2,765) (47,811)
--------------------------
Net increase in shares outstanding
before conversion 1,117 18,438
Shares converted from Class B
(See Note 1) 455 7,792
--------------------------
Net increase 1,572 $ 26,230
==========================
Year ended October 31, 2006:
Shares sold 3,443 $ 50,984
Shares issued to shareholders in
reinvestment of dividends and
distributions 251 3,390
Shares redeemed (3,861) (56,058)
--------------------------
Net increase (decrease) in shares
outstanding before conversion (167) (1,684)
Shares converted from Class B
(See Note 1) 2,468 33,510
--------------------------
Net increase 2,301 $ 31,826
==========================
</Table>
www.mainstayfunds.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 1,388 $ 22,486
Shares issued to shareholders in
reinvestment of dividends and
distributions 294 4,529
Shares redeemed (977) (15,857)
--------------------------
Net increase in shares outstanding
before conversion 705 11,158
Shares reacquired upon conversion into
Class A (See Note 1) (483) (7,792)
--------------------------
Net increase 222 $ 3,366
==========================
Year ended October 31, 2006:
Shares sold 1,012 $ 14,395
Shares issued to shareholders in
reinvestment of dividends and
distributions 296 3,798
Shares redeemed (1,325) (18,383)
--------------------------
Net decrease in shares outstanding
before conversion (17) (190)
Shares reacquired upon conversion into
Class A (See Note 1) (2,594) (33,510)
--------------------------
Net decrease (2,611) $(33,700)
==========================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 724 $ 11,775
Shares issued to shareholders in
reinvestment of dividends and
distributions 64 992
Shares redeemed (356) (5,786)
--------------------------
Net increase 432 $ 6,981
==========================
Year ended October 31, 2006:
Shares sold 405 $ 5,742
Shares issued to shareholders in
reinvestment of dividends and
distributions 31 396
Shares redeemed (257) (3,601)
--------------------------
Net increase 179 $ 2,537
==========================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 7,562 $130,916
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,881 30,992
Shares redeemed (5,797) (99,463)
--------------------------
Net increase 3,646 $ 62,445
==========================
Year ended October 31, 2006:
Shares sold 23,888 $345,724
Shares issued to shareholders in
reinvestment of dividends and
distributions 481 6,549
Shares redeemed (3,366) (51,441)
--------------------------
Net increase 21,003 $300,832
==========================
</Table>
<Table>
<Caption>
CLASS R1 SHARES AMOUNT
Year ended October 31, 2007:
Shares sold --(a) $ 2
Shares issued to shareholders in
reinvestment of dividends and
distributions 18 292
Shares redeemed (22) (373)
--------------------------
Net decrease (4) $ (79)
==========================
Year ended October 31, 2006:
Shares sold 5 $ 74
Shares issued to shareholders in
reinvestment of dividends and
distributions 12 168
Shares redeemed (30) (436)
--------------------------
Net decrease (13) $ (194)
==========================
</Table>
<Table>
<Caption>
CLASS R2 SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 13 $ 228
Shares issued to shareholders in
reinvestment of dividends and
distributions 2 30
Shares redeemed (12) (210)
------------------------
Net increase 3 $ 48
========================
Year ended October 31, 2006:
Shares sold 9 $ 138
Shares issued to shareholders in
reinvestment of dividends and
distributions 1 20
Shares redeemed (24) (359)
------------------------
Net decrease (14) $ (201)
========================
</Table>
30 MainStay International Equity Fund
<Table>
<Caption>
CLASS R3 SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 2 $ 49
Shares issued to shareholders in
reinvestment of dividends and
distributions --(a) 1
Shares redeemed (--)(a) (5)
--------------------
Net increase 2 $ 45
====================
Period ended April 28, 2006* through
October 31, 2006:
Shares sold 1 $ 10
Shares redeemed --(a) --
--------------------
Net increase 1 $ 10
====================
</Table>
* Commencement of operations.
(a) Less than one thousand.
NOTE 10--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission ("SEC") and the New York State
Attorney General, and, as noted in the notes to the year-end 2004, 2005 and 2006
financial statements of each fund of the Trust, NYLIM was previously a party to
arrangements with certain registered representatives of broker-dealers relating
to the level of trading by clients of those registered representatives in shares
of certain funds of the Trust. All such arrangements were terminated by the
fourth quarter of 2003.
NYLIM and the Trustees of the Trust undertook a review of the possible dilutive
effects that transactions under those arrangements and certain other levels of
trading by Fund shareholders over the period from 1999 to 2003 may have had on
the funds. As a result of this review, in December 2005, NYLIM made payments
totaling $5.882 million to nine MainStay funds. The amount paid to the MainStay
International Equity Fund was $772,000. NYLIM has reimbursed or paid all
expenses relating to the Board of Trustees' review of this matter.
In a separate matter, in 2004 the SEC raised concerns relating to a guarantee
provided to shareholders of the MainStay Equity Index Fund and the fees and
expenses of that Fund as well as the related guarantee disclosure to that fund's
shareholders. Discussions have been held with the SEC concerning a possible
resolution of this matter. There can be no assurance of the outcome of these
efforts.
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS:
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation becomes effective for the Fund's 2008 fiscal
year, and is to be applied to all open tax years as of the date of
effectiveness. Based on Management's analysis, the determination has been made
that the adoption of the interpretation on November 1, 2007, did not have an
impact on the Fund's financial statements upon adoption. Management continually
reviews the Fund's tax positions and such conclusions under the Interpretation
based on factors, including, but not limited to, ongoing analyses of tax laws,
regulations and interpretations, thereof.
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The changes to current generally accepted accounting
principles from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures
about fair value measurements. As of October 31, 2007, the Fund does not believe
the adoption of SFAS No. 157 will impact the amounts reported in the Fund's
financial statements. However, additional disclosures may be required about the
inputs used to develop the measurements and the effect of certain measurements
reported in the financial statements for a fiscal period.
www.mainstayfunds.com 31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay International Equity Fund ("the
Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2007, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years or periods in the
two-year period then ended, and the financial highlights for each of the years
or periods in the four-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for the
periods presented through October 31, 2003, were audited by other auditors,
whose report dated December 18, 2003, expressed an unqualified opinion thereon.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2007, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay International Equity Fund of The MainStay Funds as of October 31, 2007,
the results of its operations for the year then ended, the changes in its net
assets for each of the years or periods in the two-year period then ended, and
the financial highlights for each of the years or periods in the four-year
period then ended, in conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 20, 2007
32 MainStay International Equity Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with New York Life Investment Management LLC (the "Manager") and the
Subadvisory Agreement between the Manager and MacKay Shields LLC, a wholly-owned
indirect subsidiary of New York Life Investment Management Holdings LLC, an
affiliate of the Manager, (the "Subadvisor"), (each an "Agreement") at a meeting
held on May 22 and 23, 2007. In connection with the approval of each Agreement,
the Trustees reviewed a significant amount of a wide variety of information that
they had requested and received from the Manager and the Subadvisor, and data
and analysis from an outside data provider and a third party consultant. The
Trustees considered various industry trends and regulatory developments in their
deliberations. In considering approval of each Agreement, and in evaluating the
fairness of the compensation to be paid by the Fund, the Trustees met both as a
full Board and in executive session with no Interested Trustee present, in
advance of the meeting at which the Agreements were approved, and they
considered a number of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and the Subadvisor have provided historically to the Fund, and
also generally to other series of the Trust. Among other services, the Manager's
services have included investment management services, including monitoring and
evaluating the Subadvisor's investment program and investment results with
respect to the Fund, and the Subadvisor's compliance with the Fund's investment
policies and restrictions, and administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets,
and its other services include, among other services, providing reports to the
Manager and reviewing certain aspects of Fund filings. The Trustees considered,
among other things, the Manager's and Subadvisor's management, personnel,
resources, operations and portfolio management capabilities. The Board reviewed
reports on the Subadvisor's brokerage practices, including with respect to best
execution of portfolio trades. The Trustees considered the Manager's supervision
of the Fund's service providers and its attention to the compliance program of
the Trust, the Manager, the Subadvisor and certain other service providers, as
well as the Subadvisor's attention to its compliance program. The Trustees noted
the generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's outstanding investment
performance over the past year and the Fund's satisfactory longer term
performance.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information that indicated that the profitability to the Manager and its
affiliates from the Management Agreement with respect to the Fund was moderate
to low, and from the overall relationship with the Trust was low. The Trustees
considered other benefits that the Manager and its affiliates receive from the
relationship with the Trust, including benefits that NYLIFE Distributors and
MainStay Shareholder Services receive in exchange for services they provide to
the Funds, and certain benefits from soft dollar arrangements. The Trustees
acknowledged certain benefits to the reputation of the Manager and the Trust
from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They considered that, across the Trust
(though not every series or share class), gross transfer agency fees tended to
be relatively high and, therefore, adversely affected gross expense ratios.
Noting that the Trust historically permitted smaller investor accounts, the
Trustees considered measures that had been recently implemented that were
intended to increase the average size of shareholder accounts, including
generally higher investment minimums, and small account fees, and the Trustees
considered potential benefits to the Manager and its affiliates arising from
such measures.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the Manager's willingness to implement a
contractual breakpoint that would reduce the Fund's management fee at asset
levels above the breakpoint, and the fact that the
www.mainstayfunds.com 33
breakpoint was intended to provide that shareholders would share in benefits
from economies of scale obtained through the growth in the Fund's assets. The
Trustees noted that, due to the growth of the Fund's assets during the past two
years, the Fund's management fee rate had been reduced by the breakpoint
schedule applicable to the Fund. The Trustees reviewed information about the
potential effect of asset growth on Fund expenses, the difficulty of forecasting
its effect on the profitability of the Manager and its affiliates, and the
management fee breakpoints applicable to the Fund and certain other funds. It
was noted that, to the extent the Fund's gross expenses currently were higher
than its net expenses, the reduction of the Fund's gross expenses through the
achievement of economies of scale might benefit the Manager by reducing the
expenses the Manager must reimburse to the Fund rather than directly benefiting
the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by the
Fund, the Trustees evaluated factors such as the fees and expenses borne by
other registered funds in the market pursuing strategies generally similar to
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts having investment strategies similar to that
of the Fund, and took account of explanations and other information relating to
the fees and expenses of those other funds and accounts. The Trustees considered
the current and proposed contractual and net management fees, its anticipated
gross and net expense ratio, and various components of the expense ratio, in
comparison to other funds in comparison groupings. The Trustees generally
acknowledged the historical relationships among the Manager, the Subadvisor and
the Trust and the likely difficulties in implementing an alternative to the
investment management arrangement between the Trust and the Manager. The
Trustees took account of the Manager's willingness to maintain the management
fee waiver and expense limitation applicable to the Fund.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings, with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. This summary set out
above describes the most important, but not all, of the factors considered by
the Trustees in considering each Agreement. On the basis of their review, a
majority of the Trustees and a majority of the Non-Interested Trustees concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the judgment of a
majority of the Trustees and a majority of the Non-Interested Trustees that
approval of each Agreement was in the best interests of the Fund and its
shareholders.
34 MainStay International Equity Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advise shareholders within
60 days of the Fund's fiscal year end October 31, 2007 as to the federal tax
status of dividends paid by the Fund during such fiscal year. Accordingly, the
Fund paid long-term capital gain distributions of $36,851,040.
In accordance with federal tax law, the Fund elects to provide each shareholder
with their portion of the Fund's foreign faxes paid and the income sourced from
foreign countries. Accordingly, the Fund hereby makes the following designations
regarding its fiscal year ended October 31, 2007:
- -- the total amount of taxes paid to foreign countries was $2,357,630
- -- the total amount of income sourced from foreign countries was $25,188,855
As required by federal tax law rules, shareholders will receive notification of
their proportionate share of foreign taxes paid and foreign sourced income for
the 2007 calendar year with form 1099-DIV, which will be mailed during January
2008.
The dividends paid by the Fund during the fiscal year ended October 31, 2007,
should be multiplied by 37.4% to arrive at the amount eligible for qualified
dividend income, 20.1% for qualified interest income and 0.9% to arrive at the
amount eligible for qualified interest income.
In January 2008, shareholders will receive on IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by the
shareholders in calendar year 2007. The amounts that will be reported on such
1099-DIV will be the amounts you are to use on your federal income tax return
and will differ from the amounts which we must report for the Fund's fiscal year
ended October 31, 2007.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
or (iii) on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 1-800-MAINSTAY (1-800-624-6782). You also can obtain and review copies
of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC
(information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330).
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of The MainStay Funds (the
"Trust") was held on May 4, 2007, at the offices of New York Life Investment
Management LLC in Parsippany, New Jersey. The purpose of the meeting was to
elect the following individuals to the Board of Trustees of the Trust:
- Susan B. Kerley
- Alan R. Latshaw
- Peter Meenan
- Richard H. Nolan, Jr.
- Richard S. Trutanic
- Roman L. Weil
- John A. Weisser
- Brian A. Murdock (Interested Trustee)
There are no other Trustees of the Trust.
No other business came before the special meeting. The proposal to elect
Trustees was passed by the shareholders of the Fund as shown below:
<Table>
<Caption>
INTERNATIONAL
EQUITY VOTES VOTES
FUND FOR WITHHELD ABSTENTIONS TOTAL
Susan B. Kerley 28,120.547.839 46,538.218 28,563.000 28,195,649.057
- ---------------------------------------------------------------------------
Alan R. Latshaw 28,120,807.296 46,278.761 28,563.000 28,195,649.057
- ---------------------------------------------------------------------------
Peter Meenan 28,119,952.769 47,133.288 28,563.000 28,195,649.057
- ---------------------------------------------------------------------------
Richard H.
Nolan, Jr. 28,120,892.213 46,193.844 28,563.000 28,195,649.057
- ---------------------------------------------------------------------------
Richard S.
Trutanic 28,119,127.924 47,958.133 28,563.000 28,195,649.057
- ---------------------------------------------------------------------------
Roman L. Weil 28,119,847.971 48,238.086 28,563.000 28,195,649.057
- ---------------------------------------------------------------------------
John A. Weisser 28,120,197.509 46,888.548 28,563.000 28,195,649.057
- ---------------------------------------------------------------------------
Brian A. Murdock 28,121,682.267 45,403.790 28,563.000 28,195,649.057
- ---------------------------------------------------------------------------
</Table>
This resulted in approval of the proposal.
www.mainstayfunds.com 35
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Pursuant to
notice, a Special Meeting of Shareholders of the Trust was held on May 4, 2007,
at NYLIM's offices in Parsippany, New Jersey. The Trustees listed below were
elected to serve the Trust effective June 7, 2007.
Each Trustee serves until his or her successor is elected and qualified or until
his or her resignation, death or removal. The Retirement Policy provides that a
Trustee shall tender his or her resignation upon reaching age 72. A Trustee
reaching the age of 72 may continue for additional one-year periods with the
approval of the Board's Nominating and Governance Committee, except that no
Trustee shall serve on the Board past his or her 75th birthday. Officers serve a
term of one year and are elected annually by the Trustees. The business address
of each Trustee and officer listed below is 51 Madison Avenue, New York, New
York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF FUNDS
POSITION(S) HELD IN FUND COMPLEX
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
BRIAN A. MURDOCK Indefinite; Member of the Board of Managers 73 Trustee, Eclipse Funds since
3/14/56 Trustee and Chief and President (since 2004) and June, 2007 (3 funds); Director,
Executive Officer Chief Executive Officer (since Eclipse Funds Inc. since June
since 2006 2006), New York Life Investment 2007 (22 funds); Director,
Management LLC and New York MainStay VP Series Fund, Inc.,
Life Investment Management since 2006 (24 portfolios);
Holdings LLC; Senior Vice Director, ICAP Funds, Inc.,
President, New York Life since 2006 (3 funds)
Insurance Company (since 2004);
Chairman of the Board and
President, NYLIFE Distributors
LLC (since 2004); Member of the
Board of Managers, NYLCAP
Manager LLC and Madison Capital
Funding LLC (since 2004),
MacKay Shields LLC and
Institutional Capital LLC
(since 2006), and McMorgan &
Company LLC (since 2007); Chief
Executive Officer, Eclipse
Funds and Eclipse Funds Inc.
(since 2006); Chairman (2006 to
2007) and Director and Chief
Executive Officer (since 2006),
MainStay VP Series Fund, Inc.;
Director and Chief Executive
Officer, ICAP Funds, Inc.
(since 2006); Chief Investment
Officer, MLIM Europe and Asia
(2001 to 2003); President of
Merrill Japan and Chairman of
MLIM's Pacific Region (1999 to
2001)
-----------------------------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow Capital
Management, Inc., McMorgan & Company LLC, NYLIFE Securities Inc. and/or NYLIFE
Distributors LLC, as described in detail above in the column "Principal
Occupation(s) During Past Five Years."
36 MainStay International Equity Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. KERLEY Indefinite; Partner, Strategic Management 73 Chairman since 2005 and Trustee
8/12/51 Chairman and Advisors LLC (since 1990) since 2000, Eclipse Funds (3
Trustee since funds); Chairman since 2005 and
June 2007 Director since 1990, Eclipse
Funds Inc. (22 funds); Chairman
and Director, ICAP Funds, Inc.,
since 2006 (3 funds); Chairman
and Director, MainStay VP
Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
Legg Mason Partners Funds,
Inc., since 1991 (30
portfolios)
----------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & Young 73 Trustee, Eclipse Funds since
3/27/51 Trustee and Audit LLP (2002 to 2003); Partner, June 2007 (3 funds); Director,
Committee Arthur Andersen LLP (1989 to Eclipse Funds Inc. since June
Financial Expert 2002); Consultant to the Audit 2007 (22 funds); Director, ICAP
since 2006 and Compliance Committee of The Funds, Inc., since June 2007 (3
MainStay Funds (2004 funds); Director, MainStay VP
to 2006) Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
State Farm Associates Funds
Trusts since 2005 (3
portfolios); Trustee, State
Farm Mutual Fund Trust since
2005 (15 portfolios); Trustee,
State Farm Variable Product
Trust since 2005 (9 portfolios)
----------------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds since
12/5/41 Trustee since President and Chief Executive 2002 (3 funds); Director,
June 2007 Officer, Babson-United, Inc. Eclipse Funds Inc. since 2002
(financial services firm) (2000 (22 funds); Director, ICAP
to 2004); Independent Funds, Inc.,
Consultant (1999 to 2000); Head since 2006 (3 funds); Director,
of Global Funds, Citicorp (1995 MainStay VP Series Fund, Inc.,
to 1999) since June 2007 (24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 73 Trustee, Eclipse Funds since
NOLAN, JR. Trustee since Management; President--Shields/ June 2007 (3 funds); Director,
11/16/46 June 2007 Alliance, Alliance Capital Eclipse Funds Inc. since June
Management (1994 to 2004) 2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 2006
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman (since 1990) and Chief 73 Trustee, Eclipse Funds since
TRUTANIC Trustee since Executive Officer (1990 to June 2007 (3 funds); Director,
2/13/52 1994 1999), Somerset Group Eclipse Funds Inc. since June
(financial advisory firm); 2007 (22 funds); Director, ICAP
Managing Director and Advisor, Funds, Inc., since June 2007 (3
The Carlyle Group (private funds); Director, MainStay VP
investment firm) (2002 to Series Fund, Inc., since June
2004); Senior Managing Director 2007 (24 portfolios)
and Partner, Groupe Arnault
S.A. (private investment firm)
(1999
to 2002)
----------------------------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 37
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEE
ROMAN L. WEIL Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds since
5/22/40 Trustee and Audit Accounting, Graduate School of June 2007 (3 funds); Director,
Committee Business, University of Eclipse Funds Inc. since June
Financial Expert Chicago; President, Roman L. 2007 (22 funds); Director, ICAP
since June 2007 Weil Associates, Inc. Funds, Inc., since June 2007 (3
(consulting firm) funds); Director, MainStay VP
Series Fund, Inc., since 1994
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 73 Trustee, Eclipse Funds since
10/22/41 Trustee since Salomon Brothers, Inc. (1971 to June 2007 (3 funds); Director,
June 2007 1995) Eclipse Funds Inc. since June
2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 1997
(24 portfolios); Trustee,
Direxion Funds (69 funds) and
Direxion Insurance Trust (45
funds) since March 2007
----------------------------------------------------------------------------------------------------------------------
</Table>
Terry L. Lierman resigned as Trustee of the Trust effective May 31, 2007. Edward
J. Hogan, John B. McGuckian and Donald E. Nickelson resigned as Trustees of the
Trust effective June 7, 2007.
At a meeting of the Board of Trustees held on June 7 and 8, 2007, the following
individuals were appointed to serve as Officers of the Trust effective June 7,
2007:
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ROBERT A. Chief Legal Senior Managing Director, General Counsel and Secretary, New
ANSELMI Officer since York Life Investment Management LLC (including predecessor
10/19/46 2004 advisory organizations) (since 2000); Secretary (since 2001)
and General Counsel (since 2004), New York Life Investment
Management Holdings LLC; Senior Vice President, New York
Life Insurance Company (since 2000); Vice President and
Secretary, McMorgan & Company LLC (since 2001); Secretary,
NYLIM Service Company LLC (since 2005), NYLCAP Manager LLC
(since 2004), Madison Capital Funding LLC (since 2002), and
Institutional Capital LLC (since 2006); Chief Legal Officer,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), McMorgan Funds (since 2005) and
ICAP Funds, Inc. (since 2006); Managing Director and Senior
Counsel, Lehman Brothers Inc. (1998 to 1999); General
Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998)
-------------------------------------------------------------------------------------------------
JACK R. Treasurer and Managing Director, New York Life Investment Management LLC
BENINTENDE Principal (since June 2007); Treasurer and Principal Financial and
5/12/64 Financial and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
Accounting MainStay VP Series Fund, Inc., and ICAP Funds, Inc. (since
Officer since June 2007); Vice President, Prudential Investments (2000 to
June 2007 2007); Assistant Treasurer, JennisonDryden Family of Funds,
Target Portfolio Trust, The Prudential Series Fund and
American Skandia Trust (2006 to 2007); Treasurer and
Principal Financial Officer, The Greater China
Fund (2007)
-------------------------------------------------------------------------------------------------
STEPHEN P. President since Senior Managing Director and Chief Marketing Officer, New
FISHER March 2007 York Life Investment Management LLC (since 2005); Managing
2/22/59 Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since March 2007); Managing Director, UBS
Global Asset Management (1999 to 2003)
-------------------------------------------------------------------------------------------------
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration predecessor advisory organizations) (since 2000); Executive
2/8/59 since 2005 Vice President, New York Life Trust Company (since 2006);
Vice President--Administration, Eclipse Funds, Eclipse Funds
Inc. and MainStay VP Series Fund, Inc. (since 2005) and ICAP
Funds, Inc. (since 2006)
-------------------------------------------------------------------------------------------------
</Table>
38 MainStay International Equity Fund
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Senior Managing Director and Chief Compliance Officer (since
MICUCCI President and 2006) and Managing Director and Chief Compliance Officer
12/16/65 Chief Compliance (2003 to 2006), New York Life Investment Management LLC and
Officer since New York Life Investment Management Holdings LLC; Senior
2006 Managing Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE Distributors
LLC; Chief Compliance Officer, NYLCAP Manager LLC (since
2006); Senior Vice President and Chief Compliance Officer,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund,
Inc., and ICAP Funds, Inc. (since 2006); Vice President--
Compliance, Eclipse Funds, Eclipse Funds Inc. and MainStay
VP Series Fund, Inc. (2004 to 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002)
-------------------------------------------------------------------------------------------------
MARGUERITE E.H. Secretary since Managing Director and Associate General Counsel, New York
MORRISON* 2004 Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC (since
2005); Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP Funds,
Inc. (since 2006); Chief Legal Officer--Mutual Funds and
Vice President and Corporate Counsel, The Prudential
Insurance Company of America (2000 to 2004)
-------------------------------------------------------------------------------------------------
</Table>
* In addition to serving as Secretary to the Trust, effective January 1, 2008,
Marguerite E.H. Morrison will assume the role of Chief Legal Officer to the
Trust.
Arphiela Arizmendi resigned as Treasurer and Principal Financial and Accounting
Officer of the Trust effective June 7, 2007.
Christopher O. Blunt resigned as President of the Trust effective March 12,
2007.
Alan J. Kirshenbaum resigned as Senior Vice President of the Trust effective
March 19, 2007.
www.mainstayfunds.com 39
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay 130/30 Core Fund
MainStay 130/30 Growth Fund
MainStay All Cap Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay 130/30 High Yield Fund(2)
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Institutional Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Principal Preservation Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay 130/30 International Fund
MainStay Global High Income Fund
MainStay ICAP International Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
RETIREMENT FUNDS
MainStay Retirement 2010 Fund
MainStay Retirement 2020 Fund
MainStay Retirement 2030 Fund
MainStay Retirement 2040 Fund
MainStay Retirement 2050 Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
New York, New York
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
Chicago, Illinois
MACKAY SHIELDS LLC(3)
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
MCMORGAN & COMPANY LLC(3)
San Francisco, California
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
This page intentionally left blank
This page intentionally left blank
This page intentionally left blank
(NEW YORK LIFE INVESTMENT MANAGEMENT LLC LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2007 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO11872 (RECYCLE LOGO) MS329-07 MSIE11-12/07
10
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
LARGE CAP GROWTH FUND
Message from the President
and
Annual Report
October 31, 2007
MESSAGE FROM
THE PRESIDENT
The 12-month period ended October 31, 2007, was a dynamic one for mutual fund
investors. U.S. equity markets generally advanced, with growth stocks out-
performing value stocks at all capitalization levels. Although past performance
is no guarantee of future results, international stocks as a whole provided even
stronger returns for U.S. investors.
The progress of the equity markets, however, was far from steady. In February,
weakness in Asian markets led to sharp price declines around the globe. The
correction caused many investors to reconsider whether China and other emerging
economies could sustain their rapid growth. Fortunately, strong
corporate-earnings reports and positive economic news helped the stock market
regain its footing.
In July and August, difficulties in the subprime-mortgage market led to another
stock-market correction. A number of high-profile mortgage originators either
closed their doors or were sold to larger entities. Other leading financial
services firms faced major write-offs because of subprime-mortgage exposure.
The Federal Open Market Committee (FOMC) took prompt action to increase
liquidity and stabilize the financial markets by lowering the discount rate and
the federal funds target rate during the reporting period. These Federal Reserve
moves helped calm investor concerns, and the stock market generally advanced
from August 16, 2007, the date of an unscheduled FOMC meeting, through the end
of October 2007.
Difficulties in the subprime-mortgage market led to a "flight to quality," or a
general movement toward fixed-income securities that carry lower risk. As demand
for short- and intermediate-term Treasury securities increased, yields fell
across much of the maturity spectrum. Yields rose, however, on 20-and 30-year
Treasury bonds, and the yield curve steepened during the 12-month reporting
period.
High-yield bonds rallied from November 2006 through May 2007. But in June and
July, the yield differences--or spreads--between high-yield bonds and comparable
Treasury securities began to widen. At the end of October 2007, these spreads
were wider than when the reporting period began, making high-yield securities
more attractive to investors willing to accept higher risk.
To help investors address the challenges of today's ever-changing markets, New
York Life Investment Management LLC provides access to seven institutional
investment boutiques, each with its own proprietary research and investment
culture. As advisors and subadvisors to MainStay Funds, these boutiques bring a
wealth of experience and market insight to our shareholders. The portfolio
managers of each MainStay Fund seek to consistently apply time-tested investment
principles across a wide variety of market environments.
The report that follows provides more specific information about the market
forces and investment decisions that affected your investment in MainStay Funds
from November 1, 2006, through October 31, 2007. Please read the report
carefully. As you do, bear in mind that this annual report reflects just a short
segment of your lifetime investment journey. We look forward to continuing to
work with you, wherever that journey may lead.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
LARGE CAP GROWTH FUND
MainStay Funds
Annual Report
October 31, 2007
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 10
- --------------------------------------------------------------------------------
Portfolio of Investments 12
- --------------------------------------------------------------------------------
Financial Statements 14
- --------------------------------------------------------------------------------
Notes to Financial Statements 20
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 26
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 27
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 29
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 29
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 29
- --------------------------------------------------------------------------------
Trustees and Officers 30
</Table>
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT
MONTH-END PERFORMANCE INFORMATION, PLEASE CALL 1-800-MAINSTAY (1-800-624-6782)
OR VISIT WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 19.26% 14.77% 6.34%
Excluding sales charges 26.20 16.07 6.94
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY LARGE CAP RUSSELL 1000 GROWTH
GROWTH FUND INDEX S&P 500 INDEX
------------------ ------------------- -------------
10/31/97 9450 10000 10000
10797 12464 12199
12924 16733 15331
15618 18294 16264
10628 10987 12214
8773 8831 10369
10854 10758 12526
11656 11121 13706
13310 12102 14901
14646 13414 17336
10/31/07 18484 15992 19860
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 20.48% 15.01% 6.16%
Excluding sales charges 25.48 15.24 6.16
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY LARGE CAP RUSSELL 1000 GROWTH
GROWTH FUND INDEX S&P 500 INDEX
------------------ ------------------- -------------
10/31/97 10000 10000 10000
11340 12464 12199
13473 16733 15331
16159 18294 16264
10914 10987 12214
8942 8831 10369
10980 10758 12526
11703 11121 13706
13272 12102 14901
14484 13414 17336
10/31/07 18174 15992 19860
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 24.30% 15.21% 6.14%
Excluding sales charges 25.30 15.21 6.14
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY LARGE CAP RUSSELL 1000 GROWTH
GROWTH FUND INDEX S&P 500 INDEX
------------------ ------------------- -------------
10/31/97 10000 10000 10000
11340 12464 12199
13473 16733 15331
16159 18294 16264
10914 10987 12214
8942 8831 10369
10980 10758 12526
11703 11121 13706
13272 12102 14901
14484 13414 17336
10/31/07 18149 15992 19860
</Table>
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect maximum applicable sales charges explained in this paragraph, change in
share price, and reinvestment of dividend and capital-gain distributions. The
graphs assume an initial investment of $10,000 and reflect the deduction of all
sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase and have an annual 12b-1 fee of 1.00%.
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee and are generally available to corporate and institutional investors
with a minimum initial investment of $5 million. Class R1 shares are sold with
no initial sales charge or CDSC and have no annual 12b-1 fee. Class R2 shares
are sold with no initial sales charge or CDSC and have an annual 12b-1 fee of
..25%. Class R1 and Class R2 shares are only available through
corporate-sponsored retirement programs, which include certain minimum program
requirements. Class R3
THE DISCLOSURE AND FOOTNOTES ON THE FOLLOWING TWO PAGES ARE AN INTEGRAL PART OF
THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
27.16% 16.59% 7.31%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY LARGE CAP RUSSELL 1000 GROWTH
GROWTH FUND INDEX S&P 500 INDEX
------------------ ------------------- -------------
10/31/97 10000 10000 10000
11453 12464 12199
13745 16733 15331
16652 18294 16264
11360 10987 12214
9401 8831 10369
11659 10758 12526
12552 11121 13706
14403 12102 14901
15924 13414 17336
10/31/07 20250 15992 19860
</Table>
CLASS R1 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
26.92% 16.41% 7.17%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY LARGE CAP RUSSELL 1000 GROWTH
GROWTH FUND INDEX S&P 500 INDEX
------------------ ------------------- -------------
10/31/97 10000 10000 10000
11442 12464 12199
13718 16733 15331
16602 18294 16264
11314 10987 12214
9354 8831 10369
11589 10758 12526
12465 11121 13706
14243 12102 14901
15753 13414 17336
10/31/07 19993 15992 19860
</Table>
CLASS R2 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------------------------------------------
26.71% 16.11% 6.90%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY LARGE CAP RUSSELL 1000 GROWTH
GROWTH FUND INDEX S&P 500 INDEX
------------------ ------------------- -------------
10/31/97 10000 10000 10000
11413 12464 12199
13649 16733 15331
16478 18294 16264
11202 10987 12214
9238 8831 10369
11417 10758 12526
12248 11121 13706
13955 12102 14901
15384 13414 17336
10/31/07 19494 15992 19860
</Table>
shares are sold with no initial sales charge or CDSC, have an annual 12b-1 fee
of .50% and are available in certain individual retirement accounts or in
certain retirement plans. Performance figures reflect certain fee waivers and/or
expense limitations, without which total returns may have been lower. These fee
waivers and/or expense limitations are contractual and may be modified or
terminated only with the approval of the Board of Trustees. The Manager may
recoup the amount of certain management fee waivers or expense reimbursements
from the Fund pursuant to the contract if such action does not cause the Fund to
exceed existing expense limitations and the recoupment is made within three
years after the year in which the Manager incurred the expense. On 4/1/05, FMI
Winslow Growth Fund was reorganized into MainStay Large Cap Growth Fund Class A
shares. Prior to 4/1/05, performance for MainStay Large Cap Growth Fund Class A
shares includes the historical performance of FMI Winslow Growth Fund adjusted
to reflect the applicable sales charge, fees, estimated expenses and fee
waivers/expense limitations of Class A shares upon initial offer. Prior to
4/1/05, performance for Class B, C and I shares includes the performance of
Class A shares adjusted to reflect the applicable sales charge (or CDSC), fees,
estimated expenses and fee waivers/expense limitations of Class B, C and I
shares upon initial offer. Unadjusted, the performance shown for these newer
classes of shares might have been lower. Prior to the reorganization, FMI
Winslow Growth Fund had no sales charge
THE DISCLOSURE ON THE PRECEDING PAGE AND THE DISCLOSURE AND FOOTNOTES ON THE
FOLLOWING PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS AND SHOULD BE
CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Large Cap Growth Fund
CLASS R3 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------------------------------------------
26.42% 15.79% 6.62%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY LARGE CAP RUSSELL 1000 GROWTH
GROWTH FUND INDEX S&P 500 INDEX
------------------ ------------------- -------------
10/31/97 10000 10000 10000
11385 12464 12199
13581 16733 15331
16355 18294 16264
11090 10987 12214
9123 8831 10369
11247 10758 12526
12036 11121 13706
13696 12102 14901
15019 13414 17336
10/31/07 18986 15992 19860
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- ----------------------------------------------------------------
Russell 1000(R) Growth Index(1) 19.23% 12.61% 4.81%
S&P 500(R) Index(2) 14.56 13.88 7.10
Average Lipper large-cap growth fund(3) 21.72 11.94 5.47
</Table>
and its total net expenses were capped at 1.30%. The total expenses of MainStay
Large Cap Growth Fund are currently capped at 1.40%. Fund performance for all
share classes prior to 4/1/05 has not been adjusted to reflect the current
expense cap; had it been, the performance shown might have been lower. Prior to
4/28/06, performance for Class R3 shares includes the historical performance of
Class A shares adjusted to reflect the fees and expenses for Class R3 shares
upon initial offer.
1. The Russell 1000(R) Growth Index is an unmanaged index that measures the
performance of those Russell 1000(R) companies with higher price-to-book
ratios and higher forecasted growth values. The Russell 1000(R) Index is an
unmanaged index that measures the performance of the 1,000 largest U.S.
companies based on total market capitalization. Results assume the
reinvestment of all income and capital gains. The Russell 1000(R) Growth
Index is considered to be the Fund's broad-based securities-market index for
comparison purposes. An investment cannot be made directly in an index.
2. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500(R)
is an unmanaged index and is widely regarded as the standard for measuring
large-cap U.S. stock-market performance. Results assume reinvestment of all
income and capital gains. An investment cannot be made directly in an index.
3. Lipper Inc. is an independent monitor of fund performance. Results are based
on total returns with all dividend and capital-gain distributions reinvested.
On 4/1/05, FMI Winslow Growth Fund was reorganized into Class A shares of the
Fund. Effective 6/29/05, MainStay Blue Chip Growth Fund, which had assets of
$234.1 million, also merged into the Fund, which had assets of $16.5 million.
Performance for the Fund includes the performance history of FMI Winslow Growth
Fund from inception (7/1/95) through 3/31/05, during which time FMI Winslow
Growth Fund's asset size generally was in the range of $4 million to $52
million. Performance history shown for the Fund through 3/31/05, therefore,
reflects performance of a much smaller portfolio than the current Fund.
Performance shown may not be indicative of what performance would have been had
the portfolio been larger.
THE DISCLOSURE ON THE PRECEDING TWO PAGES IS AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 7
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY LARGE CAP GROWTH FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2007, to October 31, 2007,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1,
2007, to October 31, 2007.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six-months ended October 31, 2007. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/07 10/31/07 PERIOD(1) 10/31/07 PERIOD(1)
CLASS A SHARES $1,000.00 $1,192.20 $ 7.51 $1,018.20 $ 6.92
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,189.25 $11.64 $1,014.45 $10.71
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,187.55 $11.63 $1,014.45 $10.71
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,193.50 $ 4.20 $1,021.20 $ 3.87
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,194.85 $ 4.70 $1,020.75 $ 4.33
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,192.75 $ 6.13 $1,019.45 $ 5.65
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R3 SHARES $1,000.00 $1,192.05 $ 7.46 $1,018.25 $ 6.87
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's net annualized expense ratio of each class
(1.36% for Class A, 2.11% for Class B and Class C, 0.76% for Class I, 0.85%
for Class R1, 1.11% for Class R2 and 1.35% for Class R3) multiplied by the
average account value over the period, divided by 365 and multiplied by 184
(to reflect the one-half year period).
8 MainStay Large Cap Growth Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2007
(COMPOSITION PIE CHART)
<Table>
Common Stocks 98.4
Short-Term Investments (collateral from securities lending 6.0
is 6.0%)
Liabilities in Excess of Cash and Other Assets (4.4)
</Table>
See Portfolio of Investments on page 12 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2007 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. Google, Inc. Class A
2. Cisco Systems, Inc.
3. Microsoft Corp.
4. EMC Corp.
5. Medco Health Solutions, Inc.
6. Research In Motion, Ltd.
7. America Movil SAB de C.V., Series L, ADR
8. Southwestern Energy Co.
9. United Technologies Corp.
10. QUALCOMM, Inc.
</Table>
www.mainstayfunds.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Clark J. Winslow, Justin H. Kelly, CFA,
and R. Bart Wear, CFA, of Winslow Capital Management, Inc.
HOW DID MAINSTAY LARGE CAP GROWTH FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12-MONTH REPORTING PERIOD?
Excluding all sales charges, MainStay Large Cap Growth Fund returned 26.20% for
Class A shares, 25.48% for Class B shares and 25.30% for Class C shares for the
12 months ended October 31, 2007. Over the same period, the Fund returned 27.16%
for Class I shares, 26.92% for Class R1 shares, 26.71% for Class R2 shares and
26.42% for Class R3 shares. All share classes outperformed the 21.72% return of
the average Lipper(1) large-cap growth fund and the 19.23% return of the Russell
1000(R) Growth Index(2) for the 12 months ended October 31, 2007. The Russell
1000(R) Growth Index is the Fund's broad-based securities-market index. See page
5 for Fund returns with sales charges.
WHAT ACCOUNTED FOR THE FUND'S RELATIVE PERFORMANCE?
The Fund's relative performance resulted primarily from favorable stock
selection and overweight positions in telecommunication services, information
technology and health care.
WHICH SECTORS WERE AMONG THE FUND'S STRONGEST PERFORMERS FOR THE 12 MONTHS ENDED
OCTOBER 31, 2007, AND WHICH SECTORS WERE THE WEAKEST?
Materials was the Fund's strongest sector on an absolute basis.
Telecommunication services was the second-best-performing sector, with
performance driven by the growing use of cell phones worldwide. Energy was the
Fund's third-strongest sector, boosted by the sharp increase in the price of
oil.
The Fund's only negative sector return came from consumer discretionary. The
sector suffered from the effects of housing issues and high energy prices.
Although consumer staples and financials generated positive absolute returns,
both sectors underper-formed the Russell 1000(R) Growth Index.
DURING THE REPORTING PERIOD, WHICH INDIVIDUAL STOCKS WERE STRONG PERFORMERS AND
WHICH STOCKS WERE WEAK?
A position in Research In Motion provided the largest positive contribution to
the Fund's performance. The stock advanced on strong acceptance of the
BlackBerry(R), an integrated wireless solution. The BlackBerry platform and
devices contributed to sharp increases in the company's earnings. Apple
experienced favorable demand for virtually all of its products, and the
company's rising share price enhanced Fund results. America Movil, which is one
of the Fund's largest holdings, saw its share price rise sharply because of
surging cell phone use in Latin America, where the company is the largest
service provider.
The greatest detractor from the Fund's absolute performance was Merrill Lynch,
which suffered from large mortgage-related losses. Fortunately, the negative
results had a fairly modest impact on the Fund's performance. Comverse
Technology and Akamai Technologies also generated small declines as fundamentals
weakened.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
The Fund established a position in Intuitive Surgical. The company's shares rose
dramatically from initial purchase through the end of October, driven by strong
acceptance of the company's robotic surgery tools. We also initiated a position
in Medco Health Solutions to take advantage of strong earnings growth potential
as this pharmacy benefits manager increased its penetration in the drug-delivery
market. In early 2007, we established a major position in Southwestern Energy,
believing that the company would be successful in materially increasing its
natural gas production. This view proved correct, and the company's stock price
advanced.
Poor performance in Merrill Lynch, Comverse Technology and Akamai Technologies
led us to eliminate each of these stocks during the reporting period.
WERE THERE ANY CHANGES IN THE FUND'S POSITIONING DURING THE REPORTING PERIOD?
Weighting changes are primarily a residual of the Fund's stock-specific
investment approach. During the reporting period, we increased the Fund's
position in telecommunication services to a substantial overweight relative to
the Russell 1000(R) Growth Index, seeking to benefit from global growth in cell
phone use. We also increased the Fund's exposure to the information technology
sector from slightly underweight relative to the Russell 1000(R) Growth Index to
moderately overweight. We added exposure to technology companies with
significant international business, which has been growing faster than business
in the United States.
1. See footnote on page 7 for more information on Lipper Inc.
2. See footnote on page 7 for more information on the Russell 1000(R) Growth
Index.
10 MainStay Large Cap Growth Fund
The housing situation and higher energy prices led us to reduce the Fund's
already underweight positions in the consumer discretionary and consumer staples
sectors.
As of October 31, 2007, the Fund held overweight positions relative to the
Russell 1000(R) Growth Index in America Movil, Southwestern Energy and Medco
Health Solutions. On the same date, the Fund held no individual stock positions
that were underweight relative to the benchmark.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecast
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
www.mainstayfunds.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (98.4%)+
- ----------------------------------------------------------------------------------
AEROSPACE & DEFENSE (5.0%)
Precision Castparts Corp. 74,000 $ 11,085,940
Rockwell Collins, Inc. 177,300 13,263,813
V United Technologies Corp. 430,300 32,956,677
--------------
57,306,430
--------------
BIOTECHNOLOGY (4.9%)
Genentech, Inc. (a) 335,100 24,840,963
Genzyme Corp. (a) 259,200 19,691,424
Gilead Sciences, Inc. (a) 247,300 11,422,787
--------------
55,955,174
--------------
CAPITAL MARKETS (5.4%)
Franklin Resources, Inc. 200,600 26,013,808
Goldman Sachs Group, Inc. (The) 97,700 24,221,784
T. Rowe Price Group, Inc. 184,500 11,852,280
--------------
62,087,872
--------------
CHEMICALS (2.4%)
Ecolab, Inc. 251,400 11,858,538
Monsanto Co. 162,800 15,894,164
--------------
27,752,702
--------------
COMMUNICATIONS EQUIPMENT (12.2%)
V Cisco Systems, Inc. (a) 1,390,000 45,953,400
Corning, Inc. 427,300 10,370,571
Nokia OYJ, Sponsored ADR (b) 415,100 16,487,772
V QUALCOMM, Inc. 757,500 32,367,975
V Research In Motion, Ltd. (a) 286,900 35,721,919
--------------
140,901,637
--------------
COMPUTERS & PERIPHERALS (7.5%)
Apple, Inc. (a) 162,000 30,771,900
V EMC Corp. (a) 1,489,800 37,826,022
Hewlett-Packard Co. 345,700 17,865,776
--------------
86,463,698
--------------
CONSUMER FINANCE (1.8%)
American Express Co. 335,400 20,442,630
--------------
DIVERSIFIED FINANCIAL SERVICES (3.2%)
CME Group, Inc. 26,100 17,389,125
IntercontinentalExchange, Inc. (a)(c) 109,900 19,584,180
--------------
36,973,305
--------------
ENERGY EQUIPMENT & SERVICES (3.3%)
Schlumberger, Ltd. 160,800 15,528,456
Transocean, Inc. (a) 94,300 11,256,591
Weatherford International, Ltd. (a) 166,900 10,833,479
--------------
37,618,526
--------------
</Table>
<Table>
<Caption>
SHARES VALUE
FOOD & STAPLES RETAILING (2.0%)
CVS Caremark Corp. 562,800 $ 23,508,156
--------------
HEALTH CARE EQUIPMENT & SUPPLIES (3.2%)
Alcon, Inc. 139,600 21,248,516
Intuitive Surgical, Inc. (a) 48,800 15,951,256
--------------
37,199,772
--------------
HEALTH CARE PROVIDERS & SERVICES (3.3%)
V Medco Health Solutions, Inc. (a) 399,000 37,657,620
--------------
HOUSEHOLD PRODUCTS (0.9%)
Procter & Gamble Co. (The) 154,600 10,747,792
--------------
INDUSTRIAL CONGLOMERATES (2.4%)
General Electric Co. 386,600 15,912,456
McDermott International, Inc. (a) 191,100 11,668,566
--------------
27,581,022
--------------
INTERNET & CATALOG RETAIL (0.3%)
Priceline.com, Inc. (a) 33,200 3,090,920
--------------
INTERNET SOFTWARE & SERVICES (6.7%)
eBay, Inc. (a) 303,700 10,963,570
Equinix, Inc. (a)(c) 131,500 15,340,790
V Google, Inc. Class A (a) 72,800 51,469,600
--------------
77,773,960
--------------
IT SERVICES (2.1%)
Mastercard, Inc. Class A (c) 62,900 11,922,695
Paychex, Inc. 280,800 11,731,824
--------------
23,654,519
--------------
LIFE SCIENCES TOOLS & SERVICES (1.2%)
Thermo Fisher Scientific, Inc. (a) 231,900 13,638,039
--------------
MACHINERY (3.7%)
Danaher Corp. 356,000 30,498,520
Deere & Co. 74,900 11,602,010
--------------
42,100,530
--------------
MULTILINE RETAIL (1.8%)
Kohl's Corp. (a) 195,200 10,730,144
Target Corp. 172,600 10,590,736
--------------
21,320,880
--------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
12 MainStay Large Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ----------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS (4.4%)
V Southwestern Energy Co. (a) 658,500 $ 34,064,205
Suncor Energy, Inc. 155,700 17,007,111
--------------
51,071,316
--------------
PHARMACEUTICALS (4.4%)
Allergan, Inc. 274,700 18,564,226
Schering-Plough Corp. 358,100 10,929,212
Teva Pharmaceutical Industries, Ltd.,
Sponsored ADR (b) 490,600 21,591,306
--------------
51,084,744
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (1.1%)
MEMC Electronic Materials, Inc. (a) 178,200 13,047,804
--------------
SOFTWARE (6.1%)
Autodesk, Inc. (a) 252,300 12,337,470
V Microsoft Corp. 1,188,000 43,730,280
Salesforce.com, Inc. (a)(c) 257,900 14,537,823
--------------
70,605,573
--------------
TEXTILES, APPAREL & LUXURY GOODS (1.2%)
Coach, Inc. (a) 368,300 13,465,048
--------------
TRADING COMPANIES & DISTRIBUTORS (1.0%)
Fastenal Co. (c) 262,700 11,684,896
--------------
WIRELESS TELECOMMUNICATION SERVICES (6.9%)
V America Movil SAB de C.V.,
Series L, ADR (b) 540,000 35,310,600
American Tower Corp. Class A (a)(c) 256,400 11,327,752
China Mobile, Ltd.,
Sponsored ADR (b)(c) 138,400 14,349,312
NII Holdings, Inc. (a) 314,600 18,246,800
--------------
79,234,464
--------------
Total Common Stocks
(Cost $882,747,420) 1,133,969,029
--------------
</Table>
<Table>
<Caption>
SHARES VALUE
SHORT-TERM INVESTMENT (6.0%)
- ----------------------------------------------------------------------------------
INVESTMENT COMPANY (6.0%)
State Street Navigator Securities Lending Prime
Portfolio (d) 68,976,356 $ 68,976,356
--------------
Total Investment Company
(Cost $68,976,356) 68,976,356
--------------
Total Short-Term Investment
(Cost $68,976,356) 68,976,356
--------------
Total Investments
(Cost $951,723,776) 104.4% 1,202,945,385(e)
Liabilities in Excess of
Cash and Other Assets (4.4) (51,230,482)
------------- --------------
Net Assets 100.0% $1,151,714,903
============= ==============
</Table>
<Table>
(a) Non-income producing security.
(b) ADR--American Depositary Receipt.
(c) Represents a security, or a portion thereof, which is out on loan. The
aggregate market value of such securities is $67,398,662; cash collateral
of $68,976,356 (included in liabilities) was received with which the Fund
purchased highly liquid short-term investments.
(d) Represents a security, or a portion thereof, purchased with cash collateral
received for securities on loan.
(e) At October 31, 2007, cost is $952,948,574 for federal income tax purposes
and net unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $256,710,477
Gross unrealized depreciation (6,713,666)
------------
Net unrealized appreciation $249,996,811
============
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 13
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2007
<Table>
ASSETS:
Investment in securities, at value
(identified cost $951,723,776) including
$67,398,662 market value of securities
loaned $1,202,945,385
Cash 56,343,197
Receivables:
Fund shares sold 6,858,821
Dividends and interest 392,879
Other assets 27,391
--------------
Total assets 1,266,567,673
--------------
LIABILITIES:
Securities lending collateral 68,976,356
Payables:
Investment securities purchased 44,081,044
Fund shares redeemed 572,684
Manager (See Note 3) 484,967
Transfer agent (See Note 3) 320,360
NYLIFE Distributors (See Note 3) 242,322
Shareholder communication 113,794
Professional fees 39,104
Trustees 7,940
Custodian 7,011
Accrued expenses 7,188
--------------
Total liabilities 114,852,770
--------------
Net assets $1,151,714,903
==============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding
(par value of $.01 per share) unlimited
number of shares authorized $ 1,554,674
Additional paid-in capital 1,033,128,889
--------------
1,034,683,563
Accumulated net realized loss on investments
and foreign currency transactions (134,190,269)
Net unrealized appreciation on investments 251,221,609
--------------
Net assets $1,151,714,903
==============
CLASS A
Net assets applicable to outstanding shares $ 374,978,419
==============
Shares of beneficial interest outstanding 50,850,993
==============
Net asset value per share outstanding $ 7.37
Maximum sales charge (5.50% of offering
price) 0.43
--------------
Maximum offering price per share outstanding $ 7.80
==============
CLASS B
Net assets applicable to outstanding shares $ 132,401,673
==============
Shares of beneficial interest outstanding 18,289,523
==============
Net asset value and offering price per share
outstanding $ 7.24
==============
CLASS C
Net assets applicable to outstanding shares $ 58,119,390
==============
Shares of beneficial interest outstanding 8,034,025
==============
Net asset value and offering price per share
outstanding $ 7.23
==============
CLASS I
Net assets applicable to outstanding shares $ 524,484,921
==============
Shares of beneficial interest outstanding 70,002,890
==============
Net asset value and offering price per share
outstanding $ 7.49
==============
CLASS R1
Net assets applicable to outstanding shares $ 57,459,961
==============
Shares of beneficial interest outstanding 7,713,181
==============
Net asset value and offering price per share
outstanding $ 7.45
==============
CLASS R2
Net assets applicable to outstanding shares $ 4,153,503
==============
Shares of beneficial interest outstanding 560,942
==============
Net asset value and offering price per share
outstanding $ 7.40
==============
CLASS R3
Net assets applicable to outstanding shares $ 117,036
==============
Shares of beneficial interest outstanding 15,873
==============
Net asset value and offering price per share
outstanding $ 7.37
==============
</Table>
14 MainStay Large Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2007
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 5,076,210
Interest 743,844
Income from securities loaned--net 201,277
-------------
Total income 6,021,331
-------------
EXPENSES:
Manager (See Note 3) 6,080,582
Transfer agent--Classes A, B and C (See Note
3) 1,407,134
Transfer agent--Classes I, R1, R2 and R3
(See Note 3) 313,851
Distribution--Class B (See Note 3) 950,218
Distribution--Class C (See Note 3) 230,201
Distribution--Class R3 (See Note 3) 81
Distribution/Service--Class A (See Note 3) 651,260
Service--Class B (See Note 3) 316,739
Service--Class C (See Note 3) 76,734
Shareholder communication 183,669
Professional fees 136,647
Recordkeeping 107,400
Registration 101,067
Trustees 39,759
Custodian 26,078
Shareholder service--Class R1 (See Note 3) 21,302
Shareholder service--Class R2 (See Note 3) 1,958
Shareholder service--Class R3 (See Note 3) 32
Distribution/Service--Class R2 (See Note 3) 4,896
Distribution/Service--Class R3 (See Note 3) 81
Miscellaneous 31,085
-------------
Total expenses before waiver/reimbursement 10,680,774
Expense waiver/reimbursement from Manager
(See Note 3) (838,664)
-------------
Net expenses 9,842,110
-------------
Net investment loss (3,820,779)
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) on:
Security transactions $ 33,279,099
Foreign currency transactions (35)
-------------
Net realized gain on investments and foreign
currency transactions 33,279,064
-------------
Net change in unrealized appreciation on
investments 181,717,772
-------------
Net realized and unrealized gain on
investments and foreign currency
transactions 214,996,836
-------------
Net increase in net assets resulting from
operations $211,176,057
=============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$101,239.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 15
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2007 AND OCTOBER 31, 2006
<Table>
<Caption>
2007 2006
INCREASE IN NET ASSETS:
Operations:
Net investment loss $ (3,820,779) $ (2,616,202)
Net realized gain on investments
and foreign currency
transactions 33,279,064 2,619,250
Net change in unrealized
appreciation on investments 181,717,772 40,546,094
-----------------------------
Net increase in net assets
resulting from operations 211,176,057 40,549,142
-----------------------------
Dividends to shareholders:
From net realized gain on investments:
Class A -- (41,083)
Class B -- (92,585)
Class C -- (4,617)
Class I -- (59,626)
Class R1 -- (1)
Class R2 -- (1)
-----------------------------
Total dividends to shareholders -- (197,913)
-----------------------------
Capital share transactions:
Net proceeds from sale of shares 491,826,317 324,313,857
Net asset value of shares issued
to shareholders in reinvestment
of dividends -- 181,116
Cost of shares redeemed (166,057,894) (93,360,470)
Net asset value of shares converted
(See Note 1):
Class A 16,570,298 (33,247,592)
Class B (16,570,298) (33,247,592)
-----------------------------
Increase in net assets derived
from capital share
transactions 325,768,423 231,134,503
-----------------------------
Net increase in net assets 536,944,480 271,485,732
NET ASSETS:
Beginning of year 614,770,423 343,284,691
-----------------------------
End of year $1,151,714,903 $614,770,423
=============================
</Table>
16 MainStay Large Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
www.mainstayfunds.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
----------------------------------------------------------------------------
JULY 1,
2005*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED JUNE 30,
2007 2006 2005 2005 2004 2003
Net asset value at beginning of period $ 5.84 $ 5.31 $ 5.06 $ 4.69 $ 3.96 $ 3.92
-------- -------- ----------- ------- ------ ------
Net investment income (loss) (a) (0.04) (0.03) (0.01) (0.03) (0.03) (0.03)
Net realized and unrealized gain on
investments 1.57 0.56 0.26 0.40 0.76 0.07
-------- -------- ----------- ------- ------ ------
Total from investment operations 1.53 0.53 0.25 0.37 0.73 0.04
-------- -------- ----------- ------- ------ ------
Less distributions:
From net realized gain on investments -- (0.00)(b) -- -- -- --
-------- -------- ----------- ------- ------ ------
Net asset value at end of period $ 7.37 $ 5.84 $ 5.31 $ 5.06 $ 4.69 $ 3.96
======== ======== =========== ======= ====== ======
Total investment return (c) 26.20% 10.04% 4.94%(d) 7.89% 18.43% 1.02%
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (0.61%) (0.53%) (0.77%)+ (0.29%) (0.77%) (0.74%)
Net expenses 1.36% 1.40% 1.40%+ 1.35% 1.30% 1.30%
Expenses (before waiver/reimbursement) 1.43% 1.63% 1.77%+ 3.01% 2.78% 3.17%
Portfolio turnover rate 74% 92% 29% 27% 94% 108%
Net assets at end of period (in 000's) $374,978 $200,500 $71,859 $67,000 $4,926 $3,972
</Table>
<Table>
<Caption>
CLASS I
-----------------------------------------------------
JULY 1, APRIL 1,
2005* 2005**
THROUGH THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, JUNE 30,
2007 2006 2005 2005
Net asset value at beginning of period $ 5.89 $ 5.33 $ 5.07 $ 4.83
-------- -------- ----------- --------
Net investment income (loss) (a) (0.00)(b) 0.01 0.00(b) (0.01)
Net realized and unrealized gain on
investments 1.60 0.55 0.26 0.25
-------- -------- ----------- --------
Total from investment operations 1.60 0.56 0.26 0.24
-------- -------- ----------- --------
Less distributions:
From net realized gain on investments -- (0.00)(b) -- --
-------- -------- ----------- --------
Net asset value at end of period $ 7.49 $ 5.89 $ 5.33 $ 5.07
======== ======== =========== ========
Total investment return (c) 27.16% 10.56% 5.13%(d) 4.97%(d)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) (0.01%) 0.11% 0.06%+ (0.28%)+
Net expenses 0.76% 0.75% 0.60%+ 1.02%+
Expenses (before waiver/reimbursement) 0.91% 0.98% 0.97%+ 3.11%+
Portfolio turnover rate 74% 92% 29% 27%
Net assets at end of period (in 000's) $524,485 $259,588 $93,694 $14,349
</Table>
<Table>
* The Fund changed its fiscal year end from June 30 to October 31.
** Commencement of operations.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Less than one cent per share.
(c) Total return is calculated exclusive of sales charges. Classes I, R1, R2 and R3 are not
subject to sales charges.
(d) Total return is not annualized.
</Table>
18 MainStay Large Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B CLASS C
----------------------------------------------------- ---------------------------------------------------
JULY 1, APRIL 1, JULY 1, APRIL 1,
2005* 2005** 2005* 2005**
YEAR ENDED THROUGH THROUGH YEAR ENDED THROUGH THROUGH
OCTOBER 31, OCTOBER 31, JUNE 30, OCTOBER 31, OCTOBER 31, JUNE 30,
2007 2006 2005 2005 2007 2006 2005 2005
$ 5.77 $ 5.29 $ 5.06 $ 4.83 $ 5.77 $ 5.29 $ 5.05 $ 4.83
-------- -------- ----------- -------- ------- ------- ----------- --------
(0.08) (0.07) (0.03) 0.00(b) (0.09) (0.07) (0.03) (0.01)
1.55 0.55 0.26 0.23 1.55 0.55 0.27 0.23
-------- -------- ----------- -------- ------- ------- ----------- --------
1.47 0.48 0.23 0.23 1.46 0.48 0.24 0.22
-------- -------- ----------- -------- ------- ------- ----------- --------
-- (0.00)(b) -- -- -- (0.00)(b) -- --
-------- -------- ----------- -------- ------- ------- ----------- --------
$ 7.24 $ 5.77 $ 5.29 $ 5.06 $ 7.23 $ 5.77 $ 5.29 $ 5.05
======== ======== =========== ======== ======= ======= =========== ========
25.48% 9.13% 4.55%(d) 4.76%(d) 25.30% 9.13% 4.75%(d) 4.55%(d)
(1.34%) (1.29%) (1.52%)+ (1.41%)+ (1.37%) (1.29%) (1.52%)+ (1.41%)+
2.11% 2.15% 2.15%+ 2.15%+ 2.11% 2.15% 2.15% + 2.15%+
2.18% 2.38% 2.52%+ 4.24%+ 2.18% 2.38% 2.52% + 4.24%+
74% 92% 29% 27% 74% 92% 29% 27%
$132,402 $133,330 $169,703 $168,063 $58,119 $18,171 $8,024 $7,190
</Table>
<Table>
<Caption>
CLASS R1 CLASS R2 CLASS R3
- ------------------------------------------------------- ------------------------------------------------- --------------
JULY 1, APRIL 1, JULY 1, APRIL 1,
2005* 2005** 2005* 2005**
YEAR ENDED THROUGH THROUGH YEAR ENDED THROUGH THROUGH YEAR ENDED
OCTOBER 31, OCTOBER 31, JUNE 30, OCTOBER 31, OCTOBER 31, JUNE 30, OCTOBER 31,
2007 2006 2005 2005 2007 2006 2005 2005 2007
$ 5.87 $ 5.31 $5.06 $ 4.83 $ 5.84 $ 5.30 $ 5.05 $ 4.83 $ 5.83
------- ------ ----------- -------- ------ ------ ----------- -------- -----------
(0.01) 0.00(b) 0.00(b) (0.03) (0.02) (0.01) (0.01) (0.03) (0.04)
1.59 0.56 0.25 0.26 1.58 0.55 0.26 0.25 1.58
------- ------ ----------- -------- ------ ------ ----------- -------- -----------
1.58 0.56 0.25 0.23 1.56 0.54 0.25 0.22 1.54
------- ------ ----------- -------- ------ ------ ----------- -------- -----------
-- (0.00)(b) -- -- -- (0.00)(b) -- -- --
------- ------ ----------- -------- ------ ------ ----------- -------- -----------
$ 7.45 $ 5.87 $5.31 $ 5.06 $ 7.40 $ 5.84 $ 5.30 $ 5.05 $ 7.37
======= ====== =========== ======== ====== ====== =========== ======== ===========
26.92% 10.60% 4.94%(d) 4.76%(d) 26.71% 10.25% 4.95%(d) 4.55%(d) 26.42%
(0.19%) 0.03% 0.10%+ (0.38%)+ (0.37%) (0.24%) (0.51%)+ (0.63%)+ (0.66%)
0.85% 0.85% 0.70%+ 1.12%+ 1.11% 1.10% 0.95% + 1.37%+ 1.35%
1.01% 1.08% 1.07%+ 3.21%+ 1.27% 1.33% 1.32% + 3.46%+ 1.51%
74% 92% 29% 27% 74% 92% 29% 27% 74%
$57,460 $3,163 $ 2 $ 2 $4,154 $ 9 $ 2 $ 2 $ 117
<Caption>
CLASS R3
- --- -----------
APRIL 28,
2006**
THROUGH
OCTOBER 31,
2006
$ 5.74
-----------
(0.01)
0.10
-----------
0.09
-----------
--
-----------
$ 5.83
===========
1.57%(d)
(0.47%)+
1.37% +
1.63% +
92%
$ 10
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises nineteen funds (collectively referred to as the
"Funds"). These financial statements and notes relate only to MainStay Large Cap
Growth Fund (the "Fund"), a diversified fund.
The Fund currently offers seven classes of shares. Class A shares, Class B
shares, Class C shares, Class I shares, Class R1 shares and Class R2 shares
commenced on March 31, 2005. Distribution of Class R3 shares commenced on April
28, 2006. Class A shares are offered at net asset value per share plus an
initial sales charge. No sales charge applies on investments of $1 million or
more (and certain other qualified purchases) in Class A shares, but a contingent
deferred sales charge is imposed on certain redemptions of such shares within
one year of the date of purchase. Class B shares and Class C shares are offered
without an initial sales charge, although a declining contingent deferred sales
charge may be imposed on redemptions made within up to six years of purchase of
Class B shares and a 1% contingent deferred sales charge may be imposed on
redemptions made within one year of purchase of Class C shares. Class I, Class
R1, Class R2 and Class R3 shares are not subject to a sales charge. As approved
by the Board of Trustees in 1997, Class B shares convert to Class A shares eight
years after the date they were purchased. The seven classes of shares bear the
same voting (except for issues that relate solely to one class), dividend,
liquidation and other rights and conditions except that Class B and Class C
shares are subject to higher distribution fee rates than Class A, Class R2 and
Class R3 shares under a distribution plan pursuant to Rule 12b-1 under the 1940
Act. Class I and Class R1 shares are not subject to a distribution or service
fee. Class R1, Class R2 and Class R3 shares are authorized to pay to New York
Life Investment Management LLC, its affiliates, or third-party service
providers, as compensation for services rendered to shareholders of Class R1,
Class R2 or Class R3 shares, a shareholder service fee.
The Fund's investment objective is to seek long-term growth of capital.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). Securities that are not traded on the valuation date are
valued at the mean of the latest quoted bid and asked prices. Prices normally
are taken from the principal market in which each security trades. Investments
in mutual funds are valued at their net asset value as of the close of the New
York Stock Exchange on the date of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: a security the trading for which has been
halted or suspended; a debt security that has recently gone into default and for
which there is not a current market quotation; a security of an issuer that has
entered into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; a security where the trading on that security's principal market
is temporarily closed at a time when, under normal conditions, it would be open.
At October 31, 2007, the Fund did not hold securities that were valued in such a
manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
of net investment income and distributions of net realized capital and currency
gains, if any, annually. All dividends and distributions are reinvested in
shares of the Fund, at net asset value, unless the shareholder elects otherwise.
Dividends and distributions to shareholders are determined in accordance with
federal income tax regulations and may differ from generally accepted accounting
principles in the United States of America. Permanent book/tax differences
relating to income and gains are
20 MainStay Large Cap Growth Fund
reclassified amongst undistributed net investment income, accumulated net
realized gain or loss and paid-in-capital.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B) on
page 22) are allocated to separate classes of shares pro rata based upon their
relative net assets value on the date the expenses are incurred. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) SECURITIES LENDING. In order to realize additional income the Fund may lend
its securities to broker-dealers and financial institutions. The loans are
collateralized by cash or securities at least equal at all times to the market
value of the securities loaned. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. The Fund may bear
the risk of delay in recovery of, or loss of rights in, the securities loaned
should the borrower of the securities experience financial difficulty. The Fund
receives compensation for lending its securities in the form of fees or it
retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(H) INDEMNIFICATIONS. In the normal course of business, the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote.
However, there can be no assurance that material liabilities related to such
obligations will not arise in the future which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager") a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. NYLIM provides offices and conducts clerical, recordkeeping and
bookkeeping services, and is responsible for the financial and accounting
records required to be maintained by the Fund. NYLIM also pays the salaries and
expenses of all personnel affiliated with the Fund and all the operational
expenses that are not the responsibility of the Fund. Winslow Capital
Management, Inc. (the "Subadvisor"), is responsible for the day-to-day portfolio
management of the Fund. Pursuant to the terms of a Subadvisory Agreement between
NYLIM and the Subadvisor, NYLIM pays for the services of the Subadvisor.
The Fund is contractually obligated to pay NYLIM a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.80% on assets up to $250 million, 0.75% on assets from
$250 million up to $500 million, 0.725% on assets from $500 million up to $750
million, 0.70% on assets from $750 million up to $2.0 billion, 0.65% on assets
from $2.0 billion up to $3.0 billion and 0.60% on assets in excess of $3.0
billion. The Manager has contractually agreed to waive a portion of its
management fee so that the management fee does not exceed 0.75% on assets up to
$250 million, which is not recoupable.
Effective March 1, 2007, NYLIM has entered into a written expense limitation
agreement under which it has agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses (total annual operating expenses
excluding taxes, interest, litigation, extraordinary expenses, and brokerage and
other transaction expenses relating to the purchase or sale of portfolio
investments) do not exceed the following amounts of average daily net assets for
each class: Class A, 1.40%; Class B, 2.15%; Class C, 2.15%; Class I, 0.75%;
Class R1, 0.85%; Class R2, 1.10% and Class R3, 1.35%. This expense limitation
may be modified or terminated only
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
with the approval of the Board of Trustees. NYLIM may recoup the amount of any
management fee waivers or expense reimbursements from the Fund pursuant to the
agreement if such action does not cause the Fund to exceed existing expense
limitations and the recoupment is made within three years after the year in
which NYLIM incurred the expense.
For the year ended October 31, 2007, NYLIM earned fees from the Fund in the
amount of $6,080,582 and waived its fees in the amount of $838,664 of which
$713,664 is recoupable.
As of October 31, 2007, the amounts of waived fees that are subject to possible
recoupment by NYLIM, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 2010 TOTAL
$278,094 $ 928,988 $713,664 $1,920,746
- ----------------------------------------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Prior to March 1, 2007, NYLIM had an agreement in place under which it had
agreed to waive a portion of the Fund's management fee or reimburse the expenses
of the Fund so that the Fund's total ordinary operating expenses did not exceed
1.40% of the Fund's average daily net assets for its Class A shares. NYLIM also
applied an equivalent waiver or reimbursement, in an equal amount of basis
points, to the other share classes of the Fund.
State Street Bank & Trust Company ("SSBT"), One Lincoln Street, Boston,
Massachusetts, 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with NYLIM. These services include calculating
daily net asset values of the Fund, maintaining general ledger and sub-ledger
accounts for the calculation of the Fund's respective net asset values, and
assisting NYLIM in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, SSBT is compensated by
NYLIM.
(B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has a Distribution Agreement with NYLIFE Distributors LLC (the
"Distributor"), an indirect wholly-owned subsidiary of New York Life. The Fund,
with respect to Class A, Class B, Class C, Class R2 and Class R3 shares, has
adopted distribution plans (the "Plans") in accordance with the provisions of
Rule 12b-1 under the 1940 Act.
Pursuant to the Class A and Class R2 Plans, the Distributor receives a monthly
distribution fee from the Fund at an annual rate of 0.25% of the average daily
net assets of the Fund's Class A and Class R2 shares, which is an expense of the
Class A and Class R2 shares of the Fund for distribution or service activities
as designated by the Distributor. Pursuant to the Class B and Class C Plans, the
Fund pays the Distributor a monthly distribution fee, which is an expense of the
Class B and Class C shares of the Fund, at the annual rate of 0.75% of the
average daily net assets of the Fund's Class B and Class C shares. The Plans
provide that the Class B and Class C shares of the Fund also incur a service fee
at the annual rate of 0.25% of the average daily net asset value of the Class B
and Class C shares of the Fund. Pursuant to the Class R3 Plan, the Distributor
receives a monthly distribution fee from the Fund at the annual rate of 0.50% of
the average daily net assets of the Fund's Class R3 shares, which is an expense
of the Class R3 shares of the Fund for distribution or service activities as
designated by the Distributor. Class I and Class R1 shares are not subject to a
distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
In accordance with the Shareholder Services Plans for the Class R1, Class R2 and
Class R3 shares, the Manager has agreed to provide, through its affiliates or
independent third parties, various shareholder and administrative support
services to shareholders of the Class R1, Class R2 and Class R3 shares. For its
services, the Manager is entitled to a Shareholder Service Fee accrued daily and
paid monthly at an annual rate of 0.10% of the average daily net assets
attributable to the Class R1, Class R2 and Class R3 shares.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $98,354 for the year ended
October 31, 2007. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $2,876, $170,718 and $10,515, respectively, for the year ended October
31, 2007.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund, for the year ended October 31, 2007,
amounted to $1,720,985.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts, effective March 1, 2007. Shareholders with an account
balance of less than $1,000
22 MainStay Large Cap Growth Fund
are charged an annual per account fee of $20 (assessed semi-annually).
(F) CAPITAL. At October 31, 2007, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $ 281 0.0*%
- ---------------------------------------------------------
Class B 3,000 0.0*
- ---------------------------------------------------------
Class C 3,145 0.0*
- ---------------------------------------------------------
Class I 3,103 0.0*
- ---------------------------------------------------------
Class R1 3,086 0.0*
- ---------------------------------------------------------
Class R2 3,066 0.1
- ---------------------------------------------------------
Class R3 12,840 11.0
- ---------------------------------------------------------
</Table>
* Less than one-tenth of a percent.
(G) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2007, these fees, which are included in professional fees
shown on the Statement of Operations, were $30,084.
The Fund pays the Manager a monthly fee for certain pricing and recordkeeping
services provided under the Accounting Agreement at the annual rate of 1/20 of
1% for the first $20 million of average monthly net assets, 1/30 of 1% of the
next $80 million of average monthly net assets and 1/100 of 1% of any amount in
excess of $100 million of average monthly net assets. Fees for these services
provided to the Fund by the Manager amounted to $107,400 for the year ended
October 31, 2007.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2007, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$-- $(132,965,471) $-- $249,996,811 $117,031,340
----------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized appreciation is
primarily due to wash sale deferrals.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income, accumulated net realized loss
on investments and additional paid-in-capital, arising from permanent
differences; net assets at October 31, 2007 are not affected.
<Table>
<Caption>
ACCUMULATED
NET REALIZED
ACCUMULATED GAIN (LOSS) ADDITIONAL
NET INVESTMENT ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$3,820,779 $35 $ (3,820,814)
-----------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to net operating losses and
foreign currency reclass.
At October 31, 2007, for federal income tax purposes, capital loss carryforwards
of $132,965,471 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. To the extent that these loss carryforwards are used to
offset future capital gains, it is probable that the capital gains so offset
will not be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2008 $ 73,113
2009 53,277
2010 5,418
2011 1,157
-------------------------------------------
$132,965
-------------------------------------------
</Table>
The Fund utilized $32,729,494 of capital loss carryforwards during the year
ended October 31, 2007.
The tax character of distributions paid during the years ended October 31, 2007
and October 31, 2006, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2007 2006
Distributions paid from:
Ordinary Income $ -- $ 37,927
Long-Term Capital Gains -- 159,986
- -----------------------------------------------------------
$ -- $197,913
- -----------------------------------------------------------
</Table>
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--CUSTODIAN:
SSBT is the custodian of cash and securities of the Fund. Custodial fees are
charged to the Fund based on the market value of securities in the Fund and the
number of certain cash transactions incurred by the Fund.
NOTE 6--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. These funds pay a commitment fee, at an annual rate of .060% of the
average commitment amount, regardless of usage, to The Bank of New York, which
acts as agent to the syndicate. Such commitment fees are allocated among the
funds based upon net assets and other factors. Interest on any revolving credit
loan is charged based upon the Federal Funds Advances rate. There were no
borrowings made or outstanding on the line of credit during the year ended
October 31, 2007.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2007, purchases and sales of securities, other
than short-term securities, were $909,803 and $591,073, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 23,380 $149,896
Shares redeemed (9,478) (59,718)
----------------------
Net increase in shares outstanding
before conversion 13,902 90,178
Shares converted from Class B (See Note
1) 2,590 16,570
----------------------
Net increase 16,492 $106,748
======================
Year ended October 31, 2006:
Shares sold 20,213 $114,560
Shares issued to shareholders in
reinvestment of distributions: 7 39
Shares redeemed (5,343) (29,966)
----------------------
Net increase in shares outstanding
before conversion 14,877 84,633
Shares converted from Class B (See Note
1) 5,937 33,248
----------------------
Net increase 20,814 $117,881
======================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 2,567 $ 16,182
Shares redeemed (4,748) (29,150)
----------------------
Net decrease in shares
outstanding before conversion (2,181) (12,968)
Shares reacquired upon
conversion into Class A
(See Note 1) (2,630) (16,570)
----------------------
Net decrease (4,811) $(29,538)
======================
Year ended October 31, 2006:
Shares sold 3,170 $ 17,784
Shares issued to shareholders
in reinvestment of
distributions: 14 79
Shares redeemed (6,188) (34,479)
----------------------
Net decrease in shares
outstanding before conversion (3,004) (16,616)
Shares reacquired upon
conversion into Class A
(See Note 1) (5,958) (33,248)
----------------------
Net decrease (8,962) $(49,864)
======================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 5,750 $ 36,768
Shares redeemed (867) (5,390)
----------------------
Net increase 4,883 $ 31,378
======================
Year ended October 31, 2006:
Shares sold 2,221 $ 12,455
Shares issued to shareholders
in reinvestment of
distributions: 1 4
Shares redeemed (589) (3,284)
----------------------
Net increase 1,633 $ 9,175
======================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 36,258 $234,721
Shares redeemed (10,299) (68,850)
----------------------
Net increase 25,959 $165,871
======================
Year ended October 31, 2006:
Shares sold 30,987 $176,512
Shares issued to shareholders
in reinvestment of
distributions: 11 59
Shares redeemed (4,535) (25,575)
----------------------
Net increase 26,463 $150,996
======================
</Table>
24 MainStay Large Cap Growth Fund
<Table>
<Caption>
CLASS R1 SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 7,577 $ 50,227
Shares redeemed (403) (2,625)
----------------------
Net increase 7,174 $ 47,602
======================
Year ended October 31, 2006:
Shares sold 549 $ 2,987
Shares issued to shareholders
in reinvestment of
distributions: --(a) --(a)
Shares redeemed (10) (56)
----------------------
Net increase 539 $ 2,931
======================
</Table>
<Table>
<Caption>
CLASS R2 SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 608 $ 3,937
Shares redeemed (48) (325)
----------------------
Net increase 560 $ 3,612
======================
Year ended October 31, 2006:
Shares sold 1 $ 6
Shares issued to shareholders
in reinvestment of
distributions: --(a) --(a)
----------------------
Net increase 1 $ 6
======================
</Table>
<Table>
<Caption>
CLASS R3 SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 14 $ 95
Shares redeemed --(a) --(a)
----------------------
Net increase 14 $ 95
======================
Year ended October 31, 2006:
Shares sold 2 $ 10
----------------------
Net increase 2 $ 10
======================
</Table>
(a) Less than one thousand.
NOTE 9--OTHER MATTERS:
In 2004 the Securities and Exchange Commission ("SEC") raised concerns relating
to a guarantee provided to shareholders of the MainStay Equity Index Fund and
the fees and expenses of that Fund, as well as the related guaranteed disclosure
to that fund's shareholders. Discussions have been held with the SEC concerning
a possible resolution of this matter. There can be no assurance at this time as
to the outcome of these efforts.
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS:
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation becomes effective for the Fund's 2008 fiscal
year, and is to be applied to all open tax years as of the date of
effectiveness. Based on Management's analysis, the determination has been made
that the adoption of the interpretation on November 1, 2007, did not have an
impact on the Fund's financial statements upon adoption. Management continually
reviews the Fund's tax positions and such conclusions under the Interpretation
based on factors, including, but not limited to, ongoing analyses of tax laws,
regulations and interpretations, thereof.
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The changes to current generally accepted accounting
principles from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures
about fair value measurements. As of October 31, 2007, the Fund does not believe
the adoption of SFAS No. 157 will impact the amounts reported in the Fund's
financial statements. However, additional disclosures may be required about the
inputs used to develop the measurements and the effect of certain measurements
reported in the financial statements for a fiscal period.
www.mainstayfunds.com 25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Large Cap Growth Fund (the
"Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2007, and the related statements of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years or periods in the
two-year period then ended, the four-month period ended October 31, 2005, and
the year ended June 30, 2005. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial highlights for the years presented through
June 30, 2004, were audited by other auditors, whose report dated August 4,
2004, expressed an unqualified opinion thereon.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2007, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Large Cap Growth Fund of The MainStay Funds as of October 31, 2007, and
the results of its operations for the year then ended, the changes in its net
assets for the two-year period then ended, and the financial highlights for the
two-year period then ended, the four-month period ended October 31, 2005, and
the year ended June 30, 2005, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 20, 2007
26 MainStay Large Cap Growth Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with New York Life Investment Management LLC (the "Manager") and the
Subadvisory Agreement between the Manager and Winslow Capital Management, Inc.
(the "Subadvisor") (each an "Agreement") at a meeting held on May 22 and 23,
2007. In connection with the approval of each Agreement, the Trustees reviewed a
significant amount of a wide variety of information that they had requested and
received from the Manager and the Subadvisor, and data and analysis from an
outside data provider and a third party consultant. The Trustees considered
various industry trends and regulatory developments in their deliberations. In
considering approval of each Agreement, and in evaluating the fairness of the
compensation to be paid by the Fund, the Trustees met both as a full Board and
in executive session with no Interested Trustee present, in advance of the
meeting at which the Agreements were approved, and they considered a number of
factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and the Subadvisor have provided historically to the Fund, and
also generally to other series of the Trust. Among other services, the Manager's
services have included investment management services, including monitoring and
evaluating the Subadvisor's investment program and investment results with
respect to the Fund, and the Subadvisor's compliance with the Fund's investment
policies and restrictions, and administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets,
and its other services include, among other services, providing reports to the
Manager and reviewing certain aspects of Fund filings. The Trustees considered,
among other things, the Manager's and Subadvisor's management, personnel,
resources, operations and portfolio management capabilities. The Board reviewed
reports on the Subadvisor's brokerage practices, including with respect to best
execution of portfolio trades. The Trustees considered the Manager's supervision
of the Fund's service providers and its attention to the compliance program of
the Trust, the Manager, the Subadvisor and certain other service providers, as
well as the Subadvisor's attention to its compliance program. The Trustees noted
the generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager, has
provided to Trust shareholders.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's excellent performance
under the Subadvisor over most time periods and generally favorably
risk-adjusted returns since FMI Winslow Growth Fund was reorganized with and
into the Fund in 2004.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates and the subadvisory fee payments
made by the Manager to the Subadvisor. The Trustees were provided information
that indicated that the profitability to the Manager and its affiliates from the
Management Agreement, and from the overall relationship with the Trust, was low.
The Trustees considered other benefits that the Manager and its affiliates
receive from the relationship with the Trust, including benefits that NYLIFE
Distributors and MainStay Shareholder Services receive in exchange for services
they provide to the Funds, and certain benefits from soft dollar arrangements.
The Trustees acknowledged certain benefits to the reputation of the Manager and
the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Subadvisor, including that the program was designed to
reward providing favorable long-term results for clients. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They considered that, across the Trust
(though not every series or share class), gross transfer agency fees tended to
be relatively high and, therefore, adversely affected gross expense ratios.
Noting that the Trust historically permitted smaller investor accounts, the
Trustees considered measures that had been recently implemented that were
intended to increase the average size of shareholder accounts, including
generally higher investment minimums, and small account fees, and the Trustees
considered potential benefits to the Manager and its affiliates arising from
such measures.
www.mainstayfunds.com 27
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the Manager's willingness to implement
contractual breakpoints that would reduce the Fund's management fee at asset
levels above the breakpoints, and the fact that the breakpoints were intended to
provide that shareholders would share in benefits from economies of scale
obtained through the growth in the Fund's assets. The Trustees noted that the
Fund's management fee rate had been reduced by the breakpoint schedule
applicable to the Fund. The Trustees reviewed information about the potential
effect of asset growth on Fund expenses, the difficulty of forecasting its
effect on the profitability of the Manager and its affiliates, and the
management fee breakpoints applicable to the Fund and certain other funds. It
was noted that, to the extent the Fund's gross expenses currently were higher
than its net expenses, the reduction of the Fund's gross expenses through the
achievement of economies of scale might benefit the Manager by reducing the
expenses the Manager must reimburse to the Fund rather than directly benefiting
the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by the
Fund, the Trustees evaluated factors such as the fees and expenses borne by
other registered funds in the market pursuing strategies generally similar to
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager or Subadvisor, including other registered funds and
separate institutional accounts having investment strategies similar to that of
the Fund, and took account of explanations and other information relating to the
fees and expenses of those other funds and accounts. The Trustees considered the
current and proposed contractual and net management fees, its anticipated gross
and net expense ratio, and various components of the expense ratio, in
comparison to other funds in comparison groupings. The Trustees reviewed
information relating to the amount of the management fee retained by the Manager
and the amount paid by the Manager to the Subadvisor. The Trustees generally
acknowledged the historical relationships among the Manager and the Trust and
the likely difficulties in implementing an alternative to the investment
management arrangement between the Manager and the Trust. The Trustees took
account of the Manager's willingness to continue to waive a certain portion of
its management fee and maintain the existing contractual limitation on the
Fund's net expenses and the fact that the fee waiver and expense limitation did
not reduce the level of the subadvisory fee payable by the Manager to the
Subadvisor.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings, with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. This summary set out
above describes the most important, but not all, of the factors considered by
the Trustees in considering each Agreement. On the basis of their review, a
majority of the Trustees and a majority of the Non-Interested Trustees concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the judgment of a
majority of the Trustees and a majority of the Non-Interested Trustees that
approval of each Agreement was in the best interests of the Fund and its
shareholders.
28 MainStay Large Cap Growth Fund
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
or (iii) on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 1-800-MAINSTAY (1-800-624-6782). You also can obtain and review copies
of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC
(information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330).
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of The MainStay Funds (the
"Trust") was held on May 4, 2007, at the offices of New York Life Investment
Management LLC in Parsippany, New Jersey. The purpose of the meeting was to
elect the following individuals to the Board of Trustees of the Trust:
- Susan B. Kerley
- Alan R. Latshaw
- Peter Meenan
- Richard H. Nolan, Jr.
- Richard S. Trutanic
- Roman L. Weil
- John A. Weisser
- Brian A. Murdock (Interested Trustee)
There are no other Trustees of the Trust.
No other business came before the special meeting. The proposal to elect
Trustees was passed by the shareholders of the Fund as shown below:
<Table>
<Caption>
LARGE CAP VOTES VOTES
GROWTH FUND FOR WITHHELD ABSTENTIONS TOTAL
Susan B.
Kerley 53,132,160.866 118,098.231 64,665.000 53,314,924.097
- -----------------------------------------------------------------------------------
Alan R.
Latshaw 53,139,857.264 110,401.833 64,665.000 53,314,924.097
- -----------------------------------------------------------------------------------
Peter Meenan 53,137,105.185 113,153.912 64,665.000 53,314,924.097
- -----------------------------------------------------------------------------------
Richard H.
Nolan, Jr. 53,137,047.374 113,211.723 64,665.000 53,314,924.097
- -----------------------------------------------------------------------------------
Richard S.
Trutanic 53,137,804.620 112,454.477 64,665.000 53,314,924.097
- -----------------------------------------------------------------------------------
Roman L. Weil 53,138,703.354 111,555.743 64,665.000 53,314,924.097
- -----------------------------------------------------------------------------------
John A.
Weisser 53,136,668.713 113,590.384 64,665.000 53,314,924.097
- -----------------------------------------------------------------------------------
Brian A.
Murdock 53,140,201.045 119,058.052 64,665.000 53,314,924.097
- -----------------------------------------------------------------------------------
</Table>
This resulted in approval of the proposal.
www.mainstayfunds.com 29
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Pursuant to
notice, a Special Meeting of Shareholders of the Trust was held on May 4, 2007,
at NYLIM's offices in Parsippany, New Jersey. The Trustees listed below were
elected to serve the Trust effective June 7, 2007.
Each Trustee serves until his or her successor is elected and qualified or until
his or her resignation, death or removal. The Retirement Policy provides that a
Trustee shall tender his or her resignation upon reaching age 72. A Trustee
reaching the age of 72 may continue for additional one-year periods with the
approval of the Board's Nominating and Governance Committee, except that no
Trustee shall serve on the Board past his or her 75th birthday. Officers serve a
term of one year and are elected annually by the Trustees. The business address
of each Trustee and officer listed below is 51 Madison Avenue, New York, New
York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF FUNDS
POSITION(S) HELD IN FUND COMPLEX
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
BRIAN A. MURDOCK Indefinite; Member of the Board of Managers 73 Trustee, Eclipse Funds since
3/14/56 Trustee and Chief and President (since 2004) and June, 2007 (3 funds); Director,
Executive Officer Chief Executive Officer (since Eclipse Funds Inc. since June
since 2006 2006), New York Life Investment 2007 (22 funds); Director,
Management LLC and New York MainStay VP Series Fund, Inc.,
Life Investment Management since 2006 (24 portfolios);
Holdings LLC; Senior Vice Director, ICAP Funds, Inc.,
President, New York Life since 2006 (3 funds)
Insurance Company (since 2004);
Chairman of the Board and
President, NYLIFE Distributors
LLC (since 2004); Member of the
Board of Managers, NYLCAP
Manager LLC and Madison Capital
Funding LLC (since 2004),
MacKay Shields LLC and
Institutional Capital LLC
(since 2006), and McMorgan &
Company LLC (since 2007); Chief
Executive Officer, Eclipse
Funds and Eclipse Funds Inc.
(since 2006); Chairman (2006 to
2007) and Director and Chief
Executive Officer (since 2006),
MainStay VP Series Fund, Inc.;
Director and Chief Executive
Officer, ICAP Funds, Inc.
(since 2006); Chief Investment
Officer, MLIM Europe and Asia
(2001 to 2003); President of
Merrill Japan and Chairman of
MLIM's Pacific Region (1999 to
2001)
-----------------------------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow Capital
Management, Inc., McMorgan & Company LLC, NYLIFE Securities Inc. and/or NYLIFE
Distributors LLC, as described in detail above in the column "Principal
Occupation(s) During Past Five Years."
30 MainStay Large Cap Growth Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. KERLEY Indefinite; Partner, Strategic Management 73 Chairman since 2005 and Trustee
8/12/51 Chairman and Advisors LLC (since 1990) since 2000, Eclipse Funds (3
Trustee since funds); Chairman since 2005 and
June 2007 Director since 1990, Eclipse
Funds Inc. (22 funds); Chairman
and Director, ICAP Funds, Inc.,
since 2006 (3 funds); Chairman
and Director, MainStay VP
Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
Legg Mason Partners Funds,
Inc., since 1991 (30
portfolios)
----------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & Young 73 Trustee, Eclipse Funds since
3/27/51 Trustee and Audit LLP (2002 to 2003); Partner, June 2007 (3 funds); Director,
Committee Arthur Andersen LLP (1989 to Eclipse Funds Inc. since June
Financial Expert 2002); Consultant to the Audit 2007 (22 funds); Director, ICAP
since 2006 and Compliance Committee of The Funds, Inc., since June 2007 (3
MainStay Funds (2004 funds); Director, MainStay VP
to 2006) Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
State Farm Associates Funds
Trusts since 2005 (3
portfolios); Trustee, State
Farm Mutual Fund Trust since
2005 (15 portfolios); Trustee,
State Farm Variable Product
Trust since 2005 (9 portfolios)
----------------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds since
12/5/41 Trustee since President and Chief Executive 2002 (3 funds); Director,
June 2007 Officer, Babson-United, Inc. Eclipse Funds Inc. since 2002
(financial services firm) (2000 (22 funds); Director, ICAP
to 2004); Independent Funds, Inc.,
Consultant (1999 to 2000); Head since 2006 (3 funds); Director,
of Global Funds, Citicorp (1995 MainStay VP Series Fund, Inc.,
to 1999) since June 2007 (24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 73 Trustee, Eclipse Funds since
NOLAN, JR. Trustee since Management; President--Shields/ June 2007 (3 funds); Director,
11/16/46 June 2007 Alliance, Alliance Capital Eclipse Funds Inc. since June
Management (1994 to 2004) 2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 2006
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman (since 1990) and Chief 73 Trustee, Eclipse Funds since
TRUTANIC Trustee since Executive Officer (1990 to June 2007 (3 funds); Director,
2/13/52 1994 1999), Somerset Group Eclipse Funds Inc. since June
(financial advisory firm); 2007 (22 funds); Director, ICAP
Managing Director and Advisor, Funds, Inc., since June 2007 (3
The Carlyle Group (private funds); Director, MainStay VP
investment firm) (2002 to Series Fund, Inc., since June
2004); Senior Managing Director 2007 (24 portfolios)
and Partner, Groupe Arnault
S.A. (private investment firm)
(1999
to 2002)
----------------------------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 31
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEE
ROMAN L. WEIL Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds since
5/22/40 Trustee and Audit Accounting, Graduate School of June 2007 (3 funds); Director,
Committee Business, University of Eclipse Funds Inc. since June
Financial Expert Chicago; President, Roman L. 2007 (22 funds); Director, ICAP
since June 2007 Weil Associates, Inc. Funds, Inc., since June 2007 (3
(consulting firm) funds); Director, MainStay VP
Series Fund, Inc., since 1994
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 73 Trustee, Eclipse Funds since
10/22/41 Trustee since Salomon Brothers, Inc. (1971 to June 2007 (3 funds); Director,
June 2007 1995) Eclipse Funds Inc. since June
2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 1997
(24 portfolios); Trustee,
Direxion Funds (69 funds) and
Direxion Insurance Trust (45
funds) since March 2007
----------------------------------------------------------------------------------------------------------------------
</Table>
Terry L. Lierman resigned as Trustee of the Trust effective May 31, 2007. Edward
J. Hogan, John B. McGuckian and Donald E. Nickelson resigned as Trustees of the
Trust effective June 7, 2007.
At a meeting of the Board of Trustees held on June 7 and 8, 2007, the following
individuals were appointed to serve as Officers of the Trust effective June 7,
2007:
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ROBERT A. Chief Legal Senior Managing Director, General Counsel and Secretary, New
ANSELMI Officer since York Life Investment Management LLC (including predecessor
10/19/46 2004 advisory organizations) (since 2000); Secretary (since 2001)
and General Counsel (since 2004), New York Life Investment
Management Holdings LLC; Senior Vice President, New York
Life Insurance Company (since 2000); Vice President and
Secretary, McMorgan & Company LLC (since 2001); Secretary,
NYLIM Service Company LLC (since 2005), NYLCAP Manager LLC
(since 2004), Madison Capital Funding LLC (since 2002), and
Institutional Capital LLC (since 2006); Chief Legal Officer,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), McMorgan Funds (since 2005) and
ICAP Funds, Inc. (since 2006); Managing Director and Senior
Counsel, Lehman Brothers Inc. (1998 to 1999); General
Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998)
-------------------------------------------------------------------------------------------------
JACK R. Treasurer and Managing Director, New York Life Investment Management LLC
BENINTENDE Principal (since June 2007); Treasurer and Principal Financial and
5/12/64 Financial and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
Accounting MainStay VP Series Fund, Inc., and ICAP Funds, Inc. (since
Officer since June 2007); Vice President, Prudential Investments (2000 to
June 2007 2007); Assistant Treasurer, JennisonDryden Family of Funds,
Target Portfolio Trust, The Prudential Series Fund and
American
Skandia Trust (2006 to 2007); Treasurer and Principal
Financial Officer, The Greater China
Fund (2007)
-------------------------------------------------------------------------------------------------
STEPHEN P. President since Senior Managing Director and Chief Marketing Officer, New
FISHER March 2007 York Life Investment Management LLC (since 2005); Managing
2/22/59 Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since March 2007); Managing Director, UBS
Global Asset Management (1999 to 2003)
-------------------------------------------------------------------------------------------------
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration predecessor advisory organizations) (since 2000); Executive
2/8/59 since 2005 Vice President, New York Life Trust Company (since 2006);
Vice President--Administration, Eclipse Funds, Eclipse Funds
Inc. and MainStay VP Series Fund, Inc. (since 2005) and ICAP
Funds, Inc. (since 2006)
-------------------------------------------------------------------------------------------------
</Table>
32 MainStay Large Cap Growth Fund
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Senior Managing Director and Chief Compliance Officer (since
MICUCCI President and 2006) and Managing Director and Chief Compliance Officer
12/16/65 Chief Compliance (2003 to 2006), New York Life Investment Management LLC and
Officer since New York Life Investment Management Holdings LLC; Senior
2006 Managing Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE Distributors
LLC; Chief Compliance Officer, NYLCAP Manager LLC (since
2006); Senior Vice President and Chief Compliance Officer,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund,
Inc., and ICAP Funds, Inc. (since 2006); Vice President--
Compliance, Eclipse Funds, Eclipse Funds Inc. and MainStay
VP Series Fund, Inc. (2004 to 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002)
-------------------------------------------------------------------------------------------------
MARGUERITE E.H. Secretary since Managing Director and Associate General Counsel, New York
MORRISON* 2004 Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC (since
2005); Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP Funds,
Inc. (since 2006); Chief Legal Officer--Mutual Funds and
Vice President and Corporate Counsel, The Prudential
Insurance Company of America (2000 to 2004)
-------------------------------------------------------------------------------------------------
</Table>
* In addition to serving as Secretary to the Trust, effective January 1, 2008,
Marguerite E.H. Morrison will assume the role of Chief Legal Officer to the
Trust.
Arphiela Arizmendi resigned as Treasurer and Principal Financial and Accounting
Officer of the Trust effective June 7, 2007.
Christopher O. Blunt resigned as President of the Trust effective March 12,
2007.
Alan J. Kirshenbaum resigned as Senior Vice President of the Trust effective
March 19, 2007.
www.mainstayfunds.com 33
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay 130/30 Core Fund
MainStay 130/30 Growth Fund
MainStay All Cap Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay 130/30 High Yield Fund(2)
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay 130/30 International Fund
MainStay Global High Income Fund
MainStay ICAP International Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
RETIREMENT FUNDS
MainStay Retirement 2010 Fund
MainStay Retirement 2020 Fund
MainStay Retirement 2030 Fund
MainStay Retirement 2040 Fund
MainStay Retirement 2050 Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
New York, New York
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
Chicago, Illinois
MACKAY SHIELDS LLC(3)
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
MCMORGAN & COMPANY LLC(3)
San Francisco, California
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
(client-requested blank page in typeset)
(NEW YORK LIFE INVESTMENT MANAGEMENT LLC LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2007 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A011872 (RECYCLE LOGO) MS329-07 MSLG11-12/07
31
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MAP FUND
Message from the President
and
Annual Report
October 31, 2007
MESSAGE FROM
THE PRESIDENT
The 12-month period ended October 31, 2007, was a dynamic one for mutual fund
investors. U.S. equity markets generally advanced, with growth stocks out-
performing value stocks at all capitalization levels. Although past performance
is no guarantee of future results, international stocks as a whole provided even
stronger returns for U.S. investors.
The progress of the equity markets, however, was far from steady. In February,
weakness in Asian markets led to sharp price declines around the globe. The
correction caused many investors to reconsider whether China and other emerging
economies could sustain their rapid growth. Fortunately, strong
corporate-earnings reports and positive economic news helped the stock market
regain its footing.
In July and August, difficulties in the subprime-mortgage market led to another
stock-market correction. A number of high-profile mortgage originators either
closed their doors or were sold to larger entities. Other leading financial
services firms faced major write-offs because of subprime-mortgage exposure.
The Federal Open Market Committee (FOMC) took prompt action to increase
liquidity and stabilize the financial markets by lowering the discount rate and
the federal funds target rate during the reporting period. These Federal Reserve
moves helped calm investor concerns, and the stock market generally advanced
from August 16, 2007, the date of an unscheduled FOMC meeting, through the end
of October 2007.
Difficulties in the subprime-mortgage market led to a "flight to quality," or a
general movement toward fixed-income securities that carry lower risk. As demand
for short- and intermediate-term Treasury securities increased, yields fell
across much of the maturity spectrum. Yields rose, however, on 20-and 30-year
Treasury bonds, and the yield curve steepened during the 12-month reporting
period.
High-yield bonds rallied from November 2006 through May 2007. But in June and
July, the yield differences--or spreads--between high-yield bonds and comparable
Treasury securities began to widen. At the end of October 2007, these spreads
were wider than when the reporting period began, making high-yield securities
more attractive to investors willing to accept higher risk.
To help investors address the challenges of today's ever-changing markets, New
York Life Investment Management LLC provides access to seven institutional
investment boutiques, each with its own proprietary research and investment
culture. As advisors and subadvisors to MainStay Funds, these boutiques bring a
wealth of experience and market insight to our shareholders. The portfolio
managers of each MainStay Fund seek to consistently apply time-tested investment
principles across a wide variety of market environments.
The report that follows provides more specific information about the market
forces and investment decisions that affected your investment in MainStay Funds
from November 1, 2006, through October 31, 2007. Please read the report
carefully. As you do, bear in mind that this annual report reflects just a short
segment of your lifetime investment journey. We look forward to continuing to
work with you, wherever that journey may lead.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MAP FUND
MainStay Funds
Annual Report
October 31, 2007
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 10
- --------------------------------------------------------------------------------
Portfolio of Investments 12
- --------------------------------------------------------------------------------
Financial Statements 17
- --------------------------------------------------------------------------------
Notes to Financial Statements 23
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 30
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 31
- --------------------------------------------------------------------------------
Federal Income Tax Information 33
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 33
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 33
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 33
- --------------------------------------------------------------------------------
Trustees and Officers 34
</Table>
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT
MONTH-END PERFORMANCE INFORMATION, PLEASE CALL 1-800-MAINSTAY (1-800-624-6782)
OR VISIT WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 10.19% 16.72% 9.76%
Excluding sales charges 16.61 18.05 10.50
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
RUSSELL MIDCAP
MAINSTAY MAP FUND RUSSELL 3000 INDEX S&P 500 INDEX INDEX
----------------- ------------------ ------------- --------------
6/9/99 9450.00 10000.00 10000.00 10000.00
9407.00 10311.00 10395.00 9791.00
11215.00 11304.00 11028.00 12115.00
10959.00 8459.00 8282.00 9932.00
9538.00 7245.00 7031.00 9135.00
12364.00 8961.00 8493.00 12412.00
14145.00 9813.00 9293.00 14285.00
16056.00 10854.00 10104.00 16869.00
18754.00 12630.00 11754.00 19806.00
10/31/07 21868.00 14466.00 13466.00 22823.00
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 10.73% 16.97% 9.68%
Excluding sales charges 15.73 17.18 9.68
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
RUSSELL MIDCAP
MAINSTAY MAP FUND RUSSELL 3000 INDEX S&P 500 INDEX INDEX
----------------- ------------------ ------------- --------------
6/9/99 10000.00 10000.00 10000.00 10000.00
9929.00 10311.00 10395.00 9791.00
11757.00 11304.00 11028.00 12115.00
11395.00 8459.00 8282.00 9932.00
9840.00 7245.00 7031.00 9135.00
12667.00 8961.00 8493.00 12412.00
14386.00 9813.00 9293.00 14285.00
16205.00 10854.00 10104.00 16869.00
18788.00 12630.00 11754.00 19806.00
10/31/07 21744.00 14466.00 13466.00 22823.00
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 14.73% 17.18% 9.68%
Excluding sales charges 15.73 17.18 9.68
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
RUSSELL MIDCAP
MAINSTAY MAP FUND RUSSELL 3000 INDEX S&P 500 INDEX INDEX
----------------- ------------------ ------------- --------------
6/9/99 10000.00 10000.00 10000.00 10000.00
9929.00 10311.00 10395.00 9791.00
11757.00 11304.00 11028.00 12115.00
11395.00 8459.00 8282.00 9932.00
9840.00 7245.00 7031.00 9135.00
12667.00 8961.00 8493.00 12412.00
14386.00 9813.00 9293.00 14285.00
16205.00 10854.00 10104.00 16869.00
18788.00 12630.00 11754.00 19806.00
10/31/07 21744.00 14466.00 13466.00 22823.00
</Table>
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect maximum applicable sales charges explained in this paragraph, change in
share price, and reinvestment of dividend and capital-gain distributions. The
graphs assume an initial investment of $10,000 and reflect the deduction of all
sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge are subject to a CDSC of 1% if
redeemed within one year of purchase and have an annual 12b-1 fee of 1.00%.
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee and are generally available to corporate and institutional investors
with a minimum initial investment of $5 million. Class R1 shares are sold with
no initial sales charge or CDSC and have no annual 12b-1 fee. Class R2 shares
are sold with no initial sales charge or CDSC and have an annual 12b-1 fee of
..25%. Class R1 and R2 shares are available only through corporate-sponsored
retirement programs, which include certain minimum program requirements. Class
R3 shares are sold with no initial sales charge or CDSC, have an annual 12b-1
fee of .50% and are available in certain individual retirement accounts or in
certain retirement plans. Performance figures reflect certain fee waivers and/or
expense limitations, without which total returns may have been lower. These fee
waivers and/or expense limitations are contractual and may be modified or
terminated only with the approval of the Board of Trustees. The Manager may
recoup the amount of certain
THE DISCLOSURE AND FOOTNOTES ON THE FOLLOWING TWO PAGES ARE AN INTEGRAL PART OF
THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
CLASS I SHARES--MAXIMUM 4.75% INITIAL SALES CHARGE THROUGH 6/8/99
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 16.99% 18.45% 11.78%
Excluding sales charges 16.99 18.45 12.32
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
RUSSELL MIDCAP
MAINSTAY MAP FUND RUSSELL 3000 INDEX S&P 500 INDEX INDEX
----------------- ------------------ ------------- --------------
10/31/97 10000 10000 10000 10000
11592 11649 12199 10446
13420 14535 15331 12235
16045 15935 16264 15137
15715 11925 12214 12410
13710 10213 10369 11414
17817 12632 12526 15509
20459 13833 13706 17849
23315 15300 14901 21078
27327 17805 17336 24748
10/31/07 30452 20392 19860 28518
</Table>
CLASS R1 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
16.89% 18.31% 10.71%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
RUSSELL MIDCAP
MAINSTAY MAP FUND RUSSELL 3000 INDEX S&P 500 INDEX INDEX
----------------- ------------------ ------------- --------------
6/9/99 10000.00 10000.00 10000.00 10000.00
9963.00 10311.00 10395.00 9791.00
11896.00 11304.00 11028.00 12115.00
11638.00 8459.00 8282.00 9932.00
10146.00 7245.00 7031.00 9135.00
13170.00 8961.00 8493.00 12412.00
15096.00 9813.00 9293.00 14285.00
17185.00 10854.00 10104.00 16869.00
20121.00 12630.00 11754.00 19806.00
10/31/07 23519.00 14466.00 13466.00 22823.00
</Table>
CLASS R2 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
16.61% 18.03% 10.44%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
RUSSELL MIDCAP
MAINSTAY MAP FUND RUSSELL 3000 INDEX S&P 500 INDEX INDEX
----------------- ------------------ ------------- --------------
6/9/99 10000.00 10000.00 10000.00 10000.00
9950.00 10311.00 10395.00 9791.00
11851.00 11304.00 11028.00 12115.00
11566.00 8459.00 8282.00 9932.00
10057.00 7245.00 7031.00 9135.00
13022.00 8961.00 8493.00 12412.00
14894.00 9813.00 9293.00 14285.00
16911.00 10854.00 10104.00 16869.00
19753.00 12630.00 11754.00 19806.00
10/31/07 23033.00 14466.00 13466.00 22823.00
</Table>
management fee waivers or expense reimbursements from the Fund pursuant to the
contract if such action does not cause the Fund to exceed existing limitations
and the recoupment is made within three years after the year in which the
Manager incurred the expense. On 6/9/99, MAP-Equity Fund was reorganized as
MainStay MAP Fund Class I shares. From inception (1/21/71) through 6/8/99,
performance for MainStay MAP Fund Class I shares (first offered 6/9/99) includes
the performance of MAP-Equity Fund.
Prior to the reorganization, shares of MAP-Equity Fund were subject to a maximum
4.75% sales charge. From inception (6/9/99) through 12/31/03, performance for
Class R1 and R2 shares (first offered 1/2/04) includes the historical
performance of Class A shares adjusted to reflect the applicable fees, estimated
expenses and fee waivers/expense limitations of Class R1 and R2 shares upon
initial offer. Prior to 4/28/06, performance for Class R3 shares (first offered
4/28/06) includes the historical performance of Class A shares adjusted to
reflect the applicable sales charge (or CDSC), fees, estimated expenses and fee
waivers/expense limitations of Class R3 shares upon initial offer. Unadjusted,
the performance shown for these newer classes of shares might have been lower.
THE DISCLOSURE ON THE PRECEDING PAGE AND THE FOOTNOTES ON THE FOLLOWING PAGE ARE
AN INTEGRAL PART OF THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN
CONJUNCTION WITH THEM.
6 MainStay MAP Fund
CLASS R3 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
16.37% 17.67% 10.13%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
RUSSELL MIDCAP
MAINSTAY MAP FUND RUSSELL 3000 INDEX S&P 500 INDEX INDEX
----------------- ------------------ ------------- --------------
6/9/99 10000.00 10000.00 10000.00 10000.00
9940.00 10311.00 10395.00 9791.00
11810.00 11304.00 11028.00 12115.00
11499.00 8459.00 8282.00 9932.00
9974.00 7245.00 7031.00 9135.00
12883.00 8961.00 8493.00 12412.00
14688.00 9813.00 9293.00 14285.00
16614.00 10854.00 10104.00 16869.00
19336.00 12630.00 11754.00 19806.00
10/31/07 22502.00 14466.00 13466.00 22823.00
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
- -----------------------------------------------------------------------------------
Russell 3000(R) Index(1) 14.53% 14.83% 4.49%
Russell Midcap(R) Index(2) 15.24 20.10 10.33
S&P 500(R) Index(3) 14.56 13.88 3.60
Average Lipper multi-cap core fund(4) 16.05 14.68 6.14
</Table>
1. The Russell 3000(R) Index measures the performance of the 3,000 largest U.S.
companies based on total market capitalization. Results assume reinvestment
of all income and capital gains. An investment cannot be made directly in an
index. The Russell 3000(R) Index is considered to be the Fund's broad-based
securities-market index for comparison purposes. An investment cannot be made
directly in an index.
2. The Russell Midcap(R) Index is an unmanaged index that measures the
performance of the 800 smallest companies in the Russell 1000(R) Index,
which, in turn, is an unmanaged index that measures the performance of the
1,000 largest U.S. companies based on total market capitalization. Results
assume reinvestment of all income and capital gains. An investment cannot be
made directly in an index.
3. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500(R)
is an unmanaged index and is widely regarded as the standard for measuring
large-cap U.S. stock-market performance. Results assume reinvestment of all
income and capital gains. An investment cannot be made directly in an index.
4. Lipper Inc. is an independent monitor of fund performance. Results are based
on total returns with all dividend and capital-gain distributions reinvested.
THE DISCLOSURE ON THE TWO PRECEDING PAGES IS AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 7
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY MAP FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2007, to October 31, 2007,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1,
2007, to October 31, 2007.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six-months ended October 31, 2007. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/07 10/31/07 PERIOD(1) 10/31/07 PERIOD(1)
CLASS A SHARES $1,000.00 $1,058.75 $ 6.59 $1,018.65 $ 6.46
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,054.70 $10.46 $1,014.90 $10.26
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,054.70 $10.46 $1,014.90 $10.26
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,060.10 $ 4.78 $1,020.40 $ 4.69
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,059.80 $ 5.30 $1,019.90 $ 5.19
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,058.65 $ 6.59 $1,018.65 $ 6.46
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R3 SHARES $1,000.00 $1,057.50 $ 7.88 $1,017.40 $ 7.73
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's net annualized expense ratio of each class
(1.27% for Class A, 2.02% for Class B and Class C, 0.92% for Class I, 1.02%
for Class R1, 1.27% for Class R2 and 1.52% for Class R3) multiplied by the
average account value over the period, divided by 365 and multiplied by 184
(to reflect the one-half year period).
8 MainStay MAP Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2007
(COMPOSITION PIE CHART)
<Table>
Common Stocks 93.9
Short-Term Investments (collateral from securities lending 11.8
is 6.5%)
Convertible Preferred Stock 0.1
Convertible Bond 0.1
Warrants 0.0*
Corporate Bond 0.0*
Liabilities in Excess of Cash and Other Assets (5.9)
</Table>
* Less than one-tenth of a percent.
See Portfolio of Investments on page 12 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2007 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Morgan Stanley
2. General Electric Co.
3. E.I. du Pont de Nemours & Co.
4. Novartis AG, ADR
5. Citigroup, Inc.
6. JPMorgan Chase & Co.
7. Hess Corp.
8. Merck & Co., Inc.
9. AT&T, Inc.
10. Procter & Gamble Co. (The)
</Table>
www.mainstayfunds.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Michael J. Mullarkey, Roger Lob and
Christopher Mullarkey of Markston International LLC and by portfolio managers
Jerrold K. Senser, CFA, and Thomas R. Wenzel, CFA, of Institutional Capital LLC
HOW DID MAINSTAY MAP FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK DURING
THE 12-MONTHS ENDED OCTOBER 31, 2007?
Excluding all sales charges, MainStay MAP Fund returned 16.61% for Class A
shares, 15.73% for Class B shares and 15.73% for Class C shares for the 12
months ended October 31, 2007. Over the same period, the Fund's Class I shares
returned 16.99%, Class R1 returned 16.89%, Class R2 shares returned 16.61% and
Class R3 shares returned 16.37%. With the exception of Class B and Class C
shares, all share classes outperformed the 16.05% return of the average
Lipper(1) multi-cap core fund for the 12-month reporting period. All share
classes outperformed the 14.53% return of the Russell 3000(R) Index,(2) the
Fund's broad-based securities-market index, for the 12 months ended October 31,
2007. See page 5 for Fund returns with sales charges.
DURING THE REPORTING PERIOD, WHICH SECTORS MADE THE GREATEST POSITIVE
CONTRIBUTIONS TO PERFORMANCE IN YOUR PORTION OF THE FUND AND WHICH SECTORS WERE
THE GREATEST DETRACTORS?
Markston International:
In our portion of the Fund, agriculture-related stocks performed extremely well
on an absolute basis, supported by record domestic corn plantings and strong
worldwide demand for fertilizer. The Fund's energy stocks also generated strong
absolute performance as a result of record oil prices. Finally, some of our
information technology holdings performed well on an absolute basis, as online
business activity continued to grow. Better-than-expected growth rates for
personal computers helped computer hardware holdings in our portion of the Fund.
The weakest-performing sector in our portion of the Fund was financials, which
suffered from the subprime-mortgage crisis. Select biotechnology holdings
weakened because of concerns over Medicare reimbursement and tighter Food and
Drug Administration controls.
ICAP:
Relative to the S&P 500(R) Index,(3) energy, consumer staples and materials were
the top-performing sectors in our portion of the Fund. Information technology,
utilities and health care were our weakest sectors relative to the S&P 500(R)
Index.
DURING THE REPORTING PERIOD, WHICH STOCKS WERE STRONG CONTRIBUTORS TO
PERFORMANCE IN YOUR PORTION OF THE FUND AND WHICH STOCKS DETRACTED?
Markston International:
In our portion of the Fund, Aetna benefited from higher insurance-policy prices
and a very efficient growth plan. Monsanto advanced when farmers increased their
use of the company's modified seeds. MetLife benefited from successful
disposition of noncore assets and the company's acquisition of Travelers'
annuity business. Amgen detracted from performance when two of its
pharmaceutical products, Aranesp and Epogen, faced concerns about side effects,
regulatory issues and insurance troubles. Citigroup and Banco Popular both
suffered from the fallout in the subprime-mortgage market.
ICAP:
In our portion of the Fund, Hess, Occidental Petroleum and Textron were the
strongest contributors to absolute performance. Holdings that detracted the most
from absolute performance were Office Depot, Novartis AG and Citigroup. We
eliminated our position in Office Depot during the third quarter of 2007.
The principal risk of investing in value stocks is that they may never reach
what the portfolio manager believes is their full value or they may even go down
in value. Mid-capitalization companies are generally less established and their
stocks may be more volatile and less liquid than the securities of larger
companies. Stocks of small companies may be subject to higher price volatility,
significantly lower trading volumes, and greater spreads between bid and ask
prices than stocks of larger companies. Small companies may be more vulnerable
to adverse business or market developments than mid- or large-capitalization
companies. Funds that invest in bonds are subject to credit, inflation and
interest-rate risk and can lose principal value when interest rates rise.
Issuers of convertible securities may not be as financially strong as issuers of
securities with higher credit ratings and may be more vulnerable to changes in
the economy. If an issuer stops making interest payments, principal payments or
both on its convertible securities, these securities may become worthless and
the Fund could lose its entire investment in them.
1. See footnote on page 7 for more information on Lipper Inc.
2. See footnote on page 7 for more information on the Russell 3000 Index.
3. See footnote on page 7 for more information on the S&P 500(R) Index. The S&P
500(R) Index is a secondary benchmark of the Fund.
10 MainStay MAP Fund
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES IN YOUR PORTION OF THE FUND DURING
THE REPORTING PERIOD?
Markston International:
During the reporting period, we initiated a position in VeriSign, whose major
restructuring effort was led by a brand new management team and new group of
directors. We also invested in U.S. Bancorp, a company that offered a very
attractive dividend yield when the Federal Reserve was moving to lower interest
rates. We purchased Leucadia for our portion of the Fund when we felt the share
price was close to the company's underlying book value. We eliminated positions
in Ohio Casualty and Kinder Morgan when the companies were acquired at
attractive premiums. We reduced our position in Harris Corp. after its stock had
appreciated significantly.
ICAP:
During the reporting period, we introduced Coca-Cola to our portion of the Fund
because we expected management to alleviate several problems that had plagued
the company in recent years. We purchased Cisco Systems expecting that new
product growth would sustain double-digit revenue growth for the company. Among
the stocks we eliminated during the reporting period were Schlumberger and
McDonald's, both of which had reached our price targets.
DID THE SECTOR WEIGHTINGS IN YOUR PORTION OF THE FUND CHANGE DURING THE
REPORTING PERIOD?
Markston International:
During the reporting period, our portion of the Fund reduced exposure to the
industrials sector relative to the Russell 3000(R) Index. Although we added to
our weightings in information technology and consumer discretionary, our portion
of the Fund remained underweight relative to the Russell 3000(R) Index in both
of these sectors. As of October 31, 2007, our portion of the Fund was
underweight in consumer discretionary and consumer staples and overweight in
financials.
ICAP:
In our portion of the Fund, weightings relative to the S&P 500(R) Index
increased substantially in telecommunication services and information technology
and decreased significantly in utilities, energy and financials.
As of October 31, 2007, materials and telecommunication services were the most
heavily overweight positions relative to the S&P 500(R) Index. Over the course
of the reporting period, this positioning had a positive impact on performance.
Positioning in consumer discretionary and energy--our two most underweight
sectors relative to the S&P 500(R) at the end of October--had a positive impact
on performance. Utilities, which had a relatively neutral impact on relative
performance, was also underweight as of October 31, 2007.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecasts
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
www.mainstayfunds.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (93.9%)+
- ---------------------------------------------------------------------------------
AEROSPACE & DEFENSE (2.6%)
Boeing Co. (The) 93,700 $ 9,237,883
GenCorp, Inc. (a)(b) 117,500 1,384,150
Hexcel Corp. (a)(b) 70,300 1,759,609
Honeywell International, Inc. 34,100 2,059,981
Lockheed Martin Corp. 21,700 2,387,868
Northrop Grumman Corp. 194,328 16,249,707
Orbital Sciences Corp. (a)(b) 130,000 3,318,900
Raytheon Co. 173,600 11,042,696
--------------
47,440,794
--------------
AIRLINES (0.3%)
Southwest Airlines Co. 349,100 4,960,711
--------------
AUTO COMPONENTS (0.2%)
Goodyear Tire & Rubber Co. (The) (a) 95,650 2,883,848
--------------
BEVERAGES (2.2%)
Coca-Cola Co. (The) 563,500 34,801,760
PepsiCo, Inc. 75,541 5,568,883
--------------
40,370,643
--------------
BIOTECHNOLOGY (2.2%)
Amgen, Inc. (a) 202,200 11,749,842
Celgene Corp. (a) 115,392 7,615,872
Cubist Pharmaceuticals, Inc. (a) 22,731 531,905
Genentech, Inc. (a) 189,100 14,017,983
Genzyme Corp. (a) 89,904 6,830,007
--------------
40,745,609
--------------
BUILDING PRODUCTS (0.9%)
Masco Corp. 668,200 16,090,256
--------------
CAPITAL MARKETS (5.2%)
Ameriprise Financial, Inc. 64,460 4,059,691
Bank of New York Mellon Corp. (The) 10,075 492,164
Jefferies Group, Inc. 159,600 4,266,108
Legg Mason, Inc. 14,300 1,186,042
Merrill Lynch & Co., Inc. 83,700 5,525,874
V Morgan Stanley 1,032,110 69,419,719
Northern Trust Corp. 12,055 906,657
State Street Corp. 75,900 6,054,543
Waddell & Reed Financial, Inc. Class A (b) 78,000 2,591,160
--------------
94,501,958
--------------
CHEMICALS (4.3%)
CF Industries Holdings, Inc. 38,900 3,419,310
Chemtura Corp. 85,300 794,996
V E.I. du Pont de Nemours & Co. 1,105,400 54,728,354
Monsanto Co. 177,114 17,291,640
</Table>
<Table>
<Caption>
SHARES VALUE
CHEMICALS (CONTINUED)
Mosaic Co. (The) (a)(b) 19,450 $ 1,357,610
--------------
77,591,910
--------------
COMMERCIAL BANKS (2.1%)
Popular, Inc. (b) 433,171 4,569,954
U.S. Bancorp 111,400 3,694,024
Wachovia Corp. 95,800 4,380,934
Wells Fargo & Co. (b) 735,100 25,000,751
--------------
37,645,663
--------------
COMMERCIAL SERVICES & SUPPLIES (0.6%)
Covanta Holding Corp. (a) 260,973 7,074,978
Korn/Ferry International (a) 24,600 471,336
On Assignment, Inc. (a) 27,300 227,682
PHH Corp. (a) 48,820 1,091,615
Waste Management, Inc. 44,100 1,604,799
--------------
10,470,410
--------------
COMMUNICATIONS EQUIPMENT (3.7%)
ADC Telecommunications, Inc. (a) 37,725 705,452
Cisco Systems, Inc. (a) 933,200 30,851,592
Finisar Corp. (a) 333,489 773,694
Harris Corp. 14,100 853,896
Harris Stratex Networks, Inc. Class A (a) 5,102 97,550
Motorola, Inc. 1,773,450 33,323,126
NMS Communications Corp. (a) 159,336 254,938
Nortel Networks Corp. (a) 547 8,823
Polycom, Inc. (a)(b) 4,376 122,440
--------------
66,991,511
--------------
COMPUTERS & PERIPHERALS (2.0%)
ActivIdentity Corp. (a) 32,341 150,386
Dell, Inc. (a) 157,100 4,807,260
Hewlett-Packard Co. 407,100 21,038,928
Innovex, Inc. (a) 5,563 5,285
SanDisk Corp. (a) 150,942 6,701,825
Sun Microsystems, Inc. (a)(b) 561,797 3,207,861
--------------
35,911,545
--------------
CONSTRUCTION & ENGINEERING (0.5%)
Chicago Bridge & Iron Co. N.V. 42,000 2,100,000
Jacobs Engineering Group, Inc. (a) 72,000 6,274,800
--------------
8,374,800
--------------
CONSTRUCTION MATERIALS (0.2%)
Vulcan Materials Co. (b) 51,889 4,437,028
--------------
CONSUMER FINANCE (2.7%)
American Express Co. 421,900 25,714,805
Capital One Financial Corp. 310,000 20,332,900
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
12 MainStay MAP Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ---------------------------------------------------------------------------------
CONSUMER FINANCE (CONTINUED)
Discover Financial Services 190,730 $ 3,681,089
--------------
49,728,794
--------------
CONTAINERS & PACKAGING (0.0%) ++
Smurfit-Stone Container Corp. (a) 8,050 97,486
--------------
DIVERSIFIED CONSUMER SERVICES (0.1%)
Coinstar, Inc. (a) 60,817 2,095,146
--------------
DIVERSIFIED FINANCIAL SERVICES (5.5%)
Bank of America Corp. 13,724 662,595
CIT Group, Inc. 97,800 3,446,472
V Citigroup, Inc. 1,075,900 45,080,210
V JPMorgan Chase & Co. 958,700 45,058,900
Leucadia National Corp. (b) 115,500 5,851,230
--------------
100,099,407
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES (2.2%)
V AT&T, Inc. 921,950 38,528,291
Cincinnati Bell, Inc. (a) 188,750 1,023,025
Global Crossing, Ltd. (a)(b) 24,823 523,517
--------------
40,074,833
--------------
ELECTRIC UTILITIES (1.4%)
ALLETE, Inc. (b) 8,400 366,996
American Electric Power Co., Inc. 43,465 2,095,448
Duke Energy Corp. 1,047,600 20,082,492
Westar Energy, Inc. 101,700 2,707,254
--------------
25,252,190
--------------
ELECTRICAL EQUIPMENT (0.2%)
Rockwell Automation, Inc. 63,500 4,373,880
--------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (1.5%)
Anixter International, Inc. (a)(b) 9,300 668,205
Flextronics International, Ltd. (a) 109,416 1,346,911
Sanmina-SCI Corp. (a) 384,039 848,726
Tyco Electronics, Ltd. 669,989 23,898,508
--------------
26,762,350
--------------
ENERGY EQUIPMENT & SERVICES (0.6%)
Exterran Holdings, Inc. (a) 21,700 1,827,140
Hercules Offshore, Inc. (a)(b) 102,653 2,775,737
Key Energy Services, Inc. (a) 64,300 882,839
Newpark Resources, Inc. (a) 124,450 780,302
Parker Drilling Co. (a) 71,600 604,304
Schlumberger, Ltd. 27,100 2,617,047
Tidewater, Inc. 22,700 1,241,009
--------------
10,728,378
--------------
</Table>
<Table>
<Caption>
SHARES VALUE
FOOD & STAPLES RETAILING (2.5%)
CVS Caremark Corp. 856,426 $ 35,772,914
Longs Drug Stores Corp. 21,400 1,123,714
Pathmark Stores, Inc. (a) 153,617 2,012,383
Walgreen Co. 82,600 3,275,090
Wal-Mart Stores, Inc. 68,200 3,083,322
--------------
45,267,423
--------------
FOOD PRODUCTS (0.6%)
Archer-Daniels-Midland Co. 179,140 6,409,629
Bunge, Ltd. 45,200 5,206,588
--------------
11,616,217
--------------
GAS UTILITIES (0.1%)
National Fuel Gas Co. 13,900 674,011
Nicor, Inc. (b) 21,050 910,834
--------------
1,584,845
--------------
HEALTH CARE EQUIPMENT & SUPPLIES (1.1%)
ArthroCare Corp. (a) 16,410 1,064,024
Baxter International, Inc. 30,000 1,800,300
Boston Scientific Corp. (a) 354,150 4,912,061
Covidien, Ltd. 162,689 6,767,862
Gen-Probe, Inc. (a) 26,668 1,867,293
Hospira, Inc. (a) 86,700 3,583,311
SurModics, Inc. (a)(b) 11,192 635,034
--------------
20,629,885
--------------
HEALTH CARE PROVIDERS & SERVICES (1.1%)
Aetna, Inc. 343,020 19,267,433
Humana, Inc. (a) 13,000 974,350
SunLink Health Systems, Inc. (a) 48,725 294,786
Universal Health Services, Inc. Class B 3,000 146,250
--------------
20,682,819
--------------
HOTELS, RESTAURANTS & LEISURE (1.6%)
InterContinental Hotels Group PLC, ADR (c) 768,665 17,940,641
McDonald's Corp. 139,000 8,298,300
Wyndham Worldwide Corp. 87,540 2,873,938
--------------
29,112,879
--------------
HOUSEHOLD DURABLES (0.0%) ++
Newell Rubbermaid, Inc. 9,500 277,020
--------------
HOUSEHOLD PRODUCTS (2.0%)
V Procter & Gamble Co. (The) 528,200 36,720,464
--------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (0.4%)
AES Corp. (The) (a) 127,957 2,739,559
Dynegy, Inc. Class A (a) 265,700 2,447,097
Mirant Corp. (a) 29,700 1,258,092
--------------
6,444,748
--------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ---------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES (5.6%)
3M Co. 16,390 $ 1,415,440
V General Electric Co. 1,573,750 64,775,550
Textron, Inc. 428,350 29,646,104
Tyco International, Ltd. 162,689 6,697,906
--------------
102,535,000
--------------
INSURANCE (2.9%)
Allstate Corp. (The) 171,900 9,007,560
American International Group, Inc. 47,700 3,010,824
Aon Corp. 43,335 1,963,942
Chubb Corp. (The) 9,700 517,495
HCC Insurance Holdings, Inc. 33,200 992,348
Marsh & McLennan Cos., Inc. 54,495 1,410,876
MetLife, Inc. 252,300 17,370,855
Phoenix Cos., Inc. (The) 45,900 632,502
Principal Financial Group, Inc. 51,500 3,485,005
Travelers Cos., Inc. (The) 123,610 6,453,678
W.R. Berkley Corp. 230,550 6,937,250
--------------
51,782,335
--------------
INTERNET & CATALOG RETAIL (0.6%)
Liberty Media Corp. Interactive Class A (a) 438,790 9,315,512
Priceline.com, Inc. (a)(b) 20,631 1,920,746
Stamps.com, Inc. (a) 26,374 366,071
--------------
11,602,329
--------------
INTERNET SOFTWARE & SERVICES (2.3%)
Internet Capital Group, Inc. (a) 23,400 300,456
S1 Corp. (a) 363,069 3,057,041
VeriSign, Inc. (a)(b) 540,898 18,439,213
Yahoo!, Inc. (a) 664,254 20,658,299
--------------
42,455,009
--------------
IT SERVICES (0.3%)
CheckFree Corp. (a)(b) 24,038 1,142,526
Computer Sciences Corp. (a) 37,400 2,183,786
Electronic Data Systems Corp. 38,000 820,420
Western Union Co. (The) 15,526 342,193
--------------
4,488,925
--------------
MACHINERY (0.3%)
Caterpillar, Inc. 60,600 4,521,366
--------------
MARINE (0.1%)
American Commercial Lines, Inc. (a)(b) 139,064 2,073,444
--------------
MEDIA (0.9%)
Comcast Corp. Class A (a) 109,200 2,298,660
DIRECTV Group, Inc. (The) (a) 39,600 1,048,608
Discovery Holding Co. Class A (a) 34,587 986,075
</Table>
<Table>
<Caption>
SHARES VALUE
MEDIA (CONTINUED)
Dow Jones & Co., Inc. 5,500 $ 328,955
Gemstar-TV Guide International, Inc. (a) 127,356 877,483
Liberty Global, Inc. Class A (a) 9,060 355,605
Liberty Global, Inc. Class C (a) 23,670 868,216
Liberty Media Holding Corp. Capital Class A (a) 44,385 5,547,237
Marvel Entertainment, Inc. (a)(b) 27,500 680,350
Primedia, Inc. 11,729 106,851
Time Warner, Inc. 136,000 2,483,360
--------------
15,581,400
--------------
METALS & MINING (1.1%)
Rio Tinto PLC, Sponsored ADR (b)(c) 44,650 16,743,750
United States Steel Corp. 34,100 3,679,390
--------------
20,423,140
--------------
MULTILINE RETAIL (1.4%)
Target Corp. 422,550 25,927,668
--------------
MULTI-UTILITIES (0.3%)
Black Hills Corp. (b) 14,150 628,543
CMS Energy Corp. (b) 112,800 1,914,216
DTE Energy Co. (b) 23,100 1,145,760
Sempra Energy 27,800 1,709,978
--------------
5,398,497
--------------
OFFICE ELECTRONICS (0.0%) ++
Xerox Corp. (a) 30,400 530,176
--------------
OIL, GAS & CONSUMABLE FUELS (8.9%)
Anadarko Petroleum Corp. 88,400 5,217,368
Apache Corp. 129,000 13,391,490
BP PLC, Sponsored ADR (c) 38,800 3,026,012
Chesapeake Energy Corp. 91,200 3,600,576
Chevron Corp. 60,374 5,524,825
ConocoPhillips 52,178 4,433,043
Devon Energy Corp. 186,542 17,423,023
V Hess Corp. 576,200 41,261,682
International Coal Group, Inc. (a)(b) 240,400 1,293,352
Marathon Oil Corp. 82,300 4,866,399
Murphy Oil Corp. 4,500 331,335
Noble Energy, Inc. 28,318 2,167,460
Occidental Petroleum Corp. 531,240 36,682,122
Pogo Producing Co. (b) 89,800 5,348,488
Spectra Energy Corp. 523,800 13,608,324
Williams Cos., Inc. 113,100 4,127,019
--------------
162,302,518
--------------
PAPER & FOREST PRODUCTS (1.4%)
International Paper Co. 545,550 20,163,528
MeadWestvaco Corp. 75,005 2,523,168
</Table>
14 MainStay MAP Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ---------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS (CONTINUED)
Weyerhaeuser Co. 38,600 $ 2,930,126
--------------
25,616,822
--------------
PHARMACEUTICALS (8.3%)
Abbott Laboratories 137,800 7,526,636
Bristol-Myers Squibb Co. 884,450 26,524,656
V Merck & Co., Inc. 686,000 39,966,360
Mylan, Inc. 36,500 548,960
V Novartis AG, ADR (c) 858,550 45,649,104
Schering-Plough Corp. 99,600 3,039,792
Teva Pharmaceutical Industries, Ltd., Sponsored
ADR (c) 117,998 5,193,092
Wyeth 469,850 22,848,806
--------------
151,297,406
--------------
REAL ESTATE INVESTMENT TRUSTS (0.7%)
Colonial Properties Trust 40,200 1,259,466
Friedman, Billings, Ramsey Group, Inc. Class A (b) 23,100 99,330
HCP, Inc. 128,746 4,382,514
UDR, Inc. (b) 256,270 6,083,850
--------------
11,825,160
--------------
REAL ESTATE MANAGEMENT & DEVELOPMENT (0.2%)
St. Joe Co. (The) (b) 106,200 3,595,932
--------------
ROAD & RAIL (2.6%)
Avis Budget Group, Inc. (a) 107,870 2,251,247
Celadon Group, Inc. (a) 136,858 1,094,864
CSX Corp. 40,100 1,795,277
Norfolk Southern Corp. 692,550 35,770,208
Union Pacific Corp. 42,600 5,454,504
--------------
46,366,100
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (1.9%)
Applied Micro Circuits Corp. (a) 217,050 698,901
Intel Corp. 261,700 7,039,730
NVIDIA Corp. (a) 132,345 4,682,366
Skyworks Solutions, Inc. (a) 83,278 767,823
Texas Instruments, Inc. (b) 666,350 21,723,010
Vitesse Semiconductor Corp. (a) 75,852 84,196
Zoran Corp. (a) 9,096 231,948
--------------
35,227,974
--------------
SOFTWARE (1.5%)
Blackboard, Inc. (a) 34,639 1,728,486
Compuware Corp. (a) 236,272 2,362,720
i2 Technologies, Inc. (a)(b) 57,581 976,574
Microsoft Corp. 549,133 20,213,586
MSC.Software Corp. (a) 2,700 37,260
TIBCO Software, Inc. (a) 37,200 341,496
</Table>
<Table>
<Caption>
SHARES VALUE
SOFTWARE (CONTINUED)
Wind River Systems, Inc. (a)(b) 73,899 $ 924,476
--------------
26,584,598
--------------
SPECIALTY RETAIL (0.1%)
Circuit City Stores, Inc. (b) 15,900 126,087
PEP Boys--Manny, Moe & Jack 125,155 1,841,030
--------------
1,967,117
--------------
THRIFTS & MORTGAGE FINANCE (0.1%)
Washington Mutual, Inc. (b) 51,725 1,442,093
--------------
WIRELESS TELECOMMUNICATION SERVICES (1.8%)
Sprint Nextel Corp. 187,208 3,201,257
Vodafone Group PLC, ADR (c) 733,900 28,820,253
--------------
32,021,510
--------------
Total Common Stocks
(Cost $1,403,189,780) 1,705,531,969
--------------
CONVERTIBLE PREFERRED STOCK (0.1%)
- ---------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE (0.1%)
Six Flags, Inc.
7.25% (a) 101,400 1,962,090
--------------
Total Convertible Preferred Stock
(Cost $2,276,627) 1,962,090
--------------
<Caption>
NUMBER OF
WARRANTS
WARRANTS (0.0%)++
- ---------------------------------------------------------------------------------
MARINE (0.0%) ++
American Commercial Lines, Inc.
Strike Price $12.00
Expire 1/12/09 (a)(d) 6,765 725,749
--------------
Total Warrants
(Cost $3,173,826) 725,749
--------------
<Caption>
PRINCIPAL
AMOUNT
LONG-TERM BONDS (0.1%)
CONVERTIBLE BOND (0.1%)
- ---------------------------------------------------------------------------------
COMMERCIAL SERVICES (0.1%)
Rewards Network, Inc.
3.25%, due 10/15/23 $800,000 758,000
--------------
Total Convertible Bond
(Cost $676,849) 758,000
--------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BOND (0.0%)++
- ---------------------------------------------------------------------------------
MARINE (0.0%) ++
American Commercial Lines LLC
11.25%, due 1/1/08 (a)(d)(e)(f)(g) $5,511,870 $ 37,419
--------------
Total Corporate Bond
(Cost $0) 37,419
--------------
Total Long-Term Bonds
(Cost $676,849) 795,419
--------------
SHORT-TERM INVESTMENTS (11.8%)
- ---------------------------------------------------------------------------------
INVESTMENT COMPANIES (11.8%)
State Street Navigator Fund 96,587,360 96,587,360
State Street Navigator Securities Lending Prime
Portfolio (h) 117,975,930 117,975,930
--------------
Total Investment Companies
(Cost $214,563,290) 214,563,290
--------------
Total Short-Term Investments
(Cost $214,563,290) 214,563,290
--------------
Total Investments
(Cost $1,623,880,372) 105.9% 1,923,578,517(i)
Liabilities in Excess of
Cash and Other Assets (5.9) (107,139,617)
------------ --------------
Net Assets 100.0% $1,816,438,900
============ ==============
</Table>
<Table>
++ Less than one-tenth of a percent.
(a) Non-income producing security.
(b) Represents a security, or a portion thereof, which is out on
loan. The aggregate market value of such securities is
$114,262,008; cash collateral of $117,975,930 (included in
liabilities) was received with which the Fund purchased
highly liquid short-term investments.
(c) ADR--American Depositary Receipt.
(d) Fair valued security. The total market value of these
securities at October 31, 2007 is $763,168, which reflects
0.0% of the Fund's net assets.
(e) Illiquid security. The total market value of the security at
October 31, 2007 is $37,419, which represents 0.0% of the
Fund's net assets.
(f) Escrow reserve--reserve account for disputed claims.
(g) Issue in default.
(h) Represents a security, or a portion thereof, purchased with
cash collateral received for securities on loan.
(i) At October 31, 2007, cost is $1,627,685,518 for federal
income tax purposes and net unrealized appreciation is as
follows:
</Table>
<Table>
Gross unrealized appreciation $345,985,934
Gross unrealized depreciation (50,092,935)
------------
Net unrealized appreciation $295,892,999
============
</Table>
16 MainStay MAP Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2007
<Table>
ASSETS:
Investment in securities, at value
(identified cost $1,623,880,372) including
$114,262,008 market value of securities
loaned $1,923,578,517
Cash 19,149,401
Receivables:
Investment securities sold 4,340,792
Fund shares sold 2,172,934
Dividends and interest 1,869,911
Other assets 52,429
--------------
Total assets 1,951,163,984
--------------
LIABILITIES:
Securities lending collateral 117,975,930
Payables:
Investment securities purchased 11,087,320
Fund shares redeemed 2,822,873
Manager (See Note 3) 1,203,737
NYLIFE Distributors (See Note 3) 780,584
Transfer agent (See Note 3) 546,454
Shareholder communication 194,693
Professional fees 66,663
Trustees 19,895
Custodian 12,819
Accrued expenses 14,116
--------------
Total liabilities 134,725,084
--------------
Net assets $1,816,438,900
==============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding
(par value of $.01 per share) unlimited
number of shares authorized $ 448,483
Additional paid-in capital 1,308,980,970
--------------
1,309,429,453
Accumulated undistributed net investment
income 7,182,362
Accumulated undistributed net realized gain
on investments 200,128,940
Net unrealized appreciation on investments 299,698,145
--------------
Net assets $1,816,438,900
==============
CLASS A
Net assets applicable to outstanding shares $ 647,374,072
==============
Shares of beneficial interest outstanding 15,642,611
==============
Net asset value per share outstanding $ 41.39
Maximum sales charge (5.50% of offering
price) 2.41
--------------
Maximum offering price per share outstanding $ 43.80
==============
CLASS B
Net assets applicable to outstanding shares $ 378,341,667
==============
Shares of beneficial interest outstanding 9,753,739
==============
Net asset value and offering price per share
outstanding $ 38.79
==============
CLASS C
Net assets applicable to outstanding shares $ 331,430,063
==============
Shares of beneficial interest outstanding 8,543,847
==============
Net asset value and offering price per share
outstanding $ 38.79
==============
CLASS I
Net assets applicable to outstanding shares $ 438,054,425
==============
Shares of beneficial interest outstanding 10,397,129
==============
Net asset value and offering price per share
outstanding $ 42.13
==============
CLASS R1
Net assets applicable to outstanding shares $ 12,423,530
==============
Shares of beneficial interest outstanding 298,016
==============
Net asset value and offering price per share
outstanding $ 41.69
==============
CLASS R2
Net assets applicable to outstanding shares $ 8,559,632
==============
Shares of beneficial interest outstanding 206,779
==============
Net asset value and offering price per share
outstanding $ 41.40
==============
CLASS R3
Net assets applicable to outstanding shares $ 255,511
==============
Shares of beneficial interest outstanding 6,185
==============
Net asset value and offering price per share
outstanding $ 41.31
==============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 17
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2007
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 30,770,252
Interest 3,299,544
Income from securities loaned--net 428,586
-------------
Total income 34,498,382
-------------
EXPENSES:
Manager (See Note 3) 12,178,588
Distribution--Class B (See Note 3) 2,787,173
Distribution--Class C (See Note 3) 2,169,795
Distribution--Class R3 (See Note 3) 278
Distribution/Service--Class A (See Note 3) 1,466,372
Service--Class B (See Note 3) 929,058
Service--Class C (See Note 3) 723,265
Distribution/Service--Class R2 (See Note 3) 19,392
Distribution/Service--Class R3 (See Note 3) 278
Transfer agent--Classes A, B and C (See Note
3) 2,666,828
Transfer agent--Classes I, R1, R2 and R3
(See Note 3) 467,204
Shareholder communication 481,717
Professional fees 285,906
Recordkeeping 193,504
Registration 123,416
Trustees 89,067
Custodian 46,585
Shareholder service--Class R1 (See Note 3) 15,630
Shareholder service--Class R2 (See Note 3) 7,757
Shareholder service--Class R3 (See Note 3) 111
Miscellaneous 60,979
-------------
Total expenses 24,712,903
-------------
Net investment income 9,785,479
-------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 206,185,245
Net change in unrealized appreciation on
investments 34,411,705
-------------
Net realized and unrealized gain on
investments 240,596,950
-------------
Net increase in net assets resulting from
operations $250,382,429
=============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$154,840.
18 MainStay MAP Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2007 AND OCTOBER 31, 2006
<Table>
<Caption>
2007 2006
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 9,785,479 $ 879,993
Net realized gain on investments 206,185,245 119,386,149
Net change in unrealized
appreciation on investments 34,411,705 91,403,010
-------------------------------
Net increase in net assets
resulting from operations 250,382,429 211,669,152
-------------------------------
Dividends and distributions to shareholders:
From net investment income:
Class A (1,298,699) (654,970)
Class I (1,862,014) --
Class R1 (69,530) (14,914)
Class R2 (16,990) --
Class R3 (6) --
-------------------------------
(3,247,239) (669,884)
-------------------------------
From net realized gain on investments:
Class A (41,719,679) (22,183,084)
Class B (29,677,567) (24,673,394)
Class C (20,958,071) (11,859,654)
Class I (27,940,195) (19,312,266)
Class R1 (1,243,856) (804,376)
Class R2 (458,643) (128,903)
Class R3 (817) --
-------------------------------
(121,998,828) (78,961,677)
-------------------------------
Total dividends and
distributions to shareholders (125,246,067) (79,631,561)
-------------------------------
</Table>
<Table>
<Caption>
2007 2006
Capital share transactions:
Net proceeds from sale of shares $ 430,483,762 $ 351,019,596
Net asset value of shares issued
to shareholders in reinvestment
of dividends and distributions 111,185,137 71,149,592
Cost of shares redeemed (354,712,645) (312,844,898)
Net asset value of shares converted (See Note 1):
Class A 16,642,541 67,090,646
Class B (16,642,541) (67,090,646)
-------------------------------
Increase in net assets derived
from capital share
transactions 186,956,254 109,324,290
-------------------------------
Net increase in net assets 312,092,616 241,361,881
NET ASSETS:
Beginning of year 1,504,346,284 1,262,984,403
-------------------------------
End of year $1,816,438,900 $1,504,346,284
===============================
Accumulated undistributed net
investment income at end of year $ 7,182,362 $ 784,905
===============================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
-------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of period $ 38.55 $ 35.03 $ 32.08 $ 28.04 $ 21.95 $ 27.66
-------- -------- -------- -------- ----------- ------------
Net investment income (loss) 0.31(a) 0.11(a) 0.10(a)(b) (0.01)(a) (0.04) 0.15
Net realized and unrealized gain (loss) on
investments 5.68 5.54 4.16 4.05 6.13 (5.69)
-------- -------- -------- -------- ----------- ------------
Total from investment operations 5.99 5.65 4.26 4.04 6.09 (5.54)
-------- -------- -------- -------- ----------- ------------
Less dividends and distributions:
From net investment income (0.09) -- -- -- -- (0.11)
From net realized gain on investments (3.06) (2.13) (1.31) -- -- (0.06)
-------- -------- -------- -------- ----------- ------------
Total dividends and distributions (3.15) (2.13) (1.31) -- -- (0.17)
-------- -------- -------- -------- ----------- ------------
Net asset value at end of period $ 41.39 $ 38.55 $ 35.03 $ 32.08 $ 28.04 $ 21.95
======== ======== ======== ======== =========== ============
Total investment return (c) 16.61% 16.80% 13.51% 14.41% 27.74%(d) (20.04%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.79% 0.28% 0.29%(b) (0.05%) (0.17%)+ 0.63%
Net expenses 1.27% 1.35% 1.35% 1.35% 1.35% + 1.33%
Expenses (before reimbursement) 1.27% 1.33% 1.37% 1.38% 1.45% + 1.44%
Portfolio turnover rate 76% 100% 56% 64% 61% 77%
Net assets at end of period (in 000's) $647,374 $524,523 $358,214 $268,513 $176,932 $123,461
</Table>
<Table>
<Caption>
CLASS C
-------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of period $ 36.49 $ 33.50 $ 30.96 $ 27.26 $ 21.47 $ 27.13
-------- -------- -------- -------- ----------- ------------
Net investment income (loss) 0.01(a) (0.16)(a) (0.15)(a)(b) (0.24)(a) (0.16) (0.03)
Net realized and unrealized gain (loss) on
investments 5.35 5.28 4.00 3.94 5.95 (5.57)
-------- -------- -------- -------- ----------- ------------
Total from investment operations 5.36 5.12 3.85 3.70 5.79 (5.60)
-------- -------- -------- -------- ----------- ------------
Less dividends and distributions:
From net investment income -- -- -- -- -- --
From net realized gain on investments (3.06) (2.13) (1.31) -- -- (0.06)
-------- -------- -------- -------- ----------- ------------
Total dividends and distributions (3.06) (2.13) (1.31) -- -- (0.06)
-------- -------- -------- -------- ----------- ------------
Net asset value at end of period $ 38.79 $ 36.49 $ 33.50 $ 30.96 $ 27.26 $ 21.47
======== ======== ======== ======== =========== ============
Total investment return (c) 15.73% 15.94% 12.64% 13.57% 26.97%(d) (20.63%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.04% (0.46%) (0.46%)(b) (0.80%) (0.92%)+ (0.12%)
Net expenses 2.02% 2.10% 2.10% 2.10% 2.10% + 2.08%
Expenses (before reimbursement) 2.02% 2.08% 2.12% 2.13% 2.20% + 2.19%
Portfolio turnover rate 76% 100% 56% 64% 61% 77%
Net assets at end of period (in 000's) $331,430 $245,458 $181,398 $138,044 $95,004 $69,077
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Net investment income (loss) and the ratio of net investment income (loss) includes $0.04
per share and 0.11%, respectively as a result of a special one time dividend from
Microsoft Corp.
(c) Total return is calculated exclusive of sales charges. Classes I, R1, R2 and R3 are not
subject to sales charges.
(d) Total return is not annualized.
(e) Less than one cent per share.
</Table>
20 MainStay MAP Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
----------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
$ 36.49 $ 33.50 $ 30.96 $ 27.26 $ 21.47 $ 27.13
-------- -------- -------- -------- ----------- ------------
0.02(a) (0.15)(a) (0.15)(a)(b) (0.24)(a) (0.16) (0.03)
5.34 5.27 4.00 3.94 5.95 (5.57)
-------- -------- -------- -------- ----------- ------------
5.36 5.12 3.85 3.70 5.79 (5.60)
-------- -------- -------- -------- ----------- ------------
-- -- -- -- -- --
(3.06) (2.13) (1.31) -- -- (0.06)
-------- -------- -------- -------- ----------- ------------
(3.06) (2.13) (1.31) -- -- (0.06)
-------- -------- -------- -------- ----------- ------------
$ 38.79 $ 36.49 $ 33.50 $ 30.96 $ 27.26 $ 21.47
======== ======== ======== ======== =========== ============
15.73% 15.94% 12.64% 13.57% 26.97% (d) (20.63%)
0.06% (0.45%) (0.46%)(b) (0.80%) (0.92%)+ (0.12%)
2.02% 2.10% 2.10% 2.10% 2.10% + 2.08%
2.02% 2.08% 2.12% 2.13% 2.20% + 2.19%
76% 100% 56% 64% 61% 77%
$378,342 $354,543 $387,772 $313,765 $220,932 $153,581
<Caption>
</Table>
<Table>
<Caption>
CLASS I
----------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
$ 39.15 $ 35.50 $ 32.37 $ 28.19 $ 22.03 $ 27.75
-------- -------- -------- -------- ----------- ------------
0.45(a) 0.23(a) 0.24(a)(b) 0.09(a) 0.00(a)(e) 0.19
5.78 5.62 4.20 4.09 6.16 (5.69)
-------- -------- -------- -------- ----------- ------------
6.23 5.85 4.44 4.18 6.16 (5.50)
-------- -------- -------- -------- ----------- ------------
(0.19) (0.07) -- -- -- (0.16)
(3.06) (2.13) (1.31) -- -- (0.06)
-------- -------- -------- -------- ----------- ------------
(3.25) (2.20) (1.31) -- -- (0.22)
-------- -------- -------- -------- ----------- ------------
$ 42.13 $ 39.15 $ 35.50 $ 32.37 $ 28.19 $ 22.03
======== ======== ======== ======== =========== ============
16.99% 17.21% 13.96% 14.83% 27.96%(d) (19.81%)
1.15% 0.61% 0.69%(b) 0.31% 0.08%+ 0.88%
0.92% 1.03% 0.95% 0.99% 1.10%+ 1.08%
0.92% 1.01% 0.97% 1.02% 1.20%+ 1.19%
76% 100% 56% 64% 61% 77%
$438,054 $358,423 $320,099 $274,975 $183,283 $115,186
<Caption>
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 21
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R1 CLASS R2
------------------------------------------------------ -------------
JANUARY 2,
2004**
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, OCTOBER 31,
2007 2006 2005 2004 2007
Net asset value at beginning of period $ 38.78 $ 35.19 $ 32.13 $30.38 $38.54
---------- ------- ------- ----------- ----------
Net investment income (loss) 0.42(a) 0.19(a) 0.16(a)(b) 0.05(a) 0.32(a)
Net realized and unrealized gain on
investments 5.71 5.57 4.21 1.70 5.68
---------- ------- ------- ----------- ----------
Total from investment operations 6.13 5.76 4.37 1.75 6.00
---------- ------- ------- ----------- ----------
Less dividends and distributions:
From net investment income (0.16) (0.04) -- -- (0.08)
From net realized gain on investments (3.06) (2.13) (1.31) -- (3.06)
---------- ------- ------- ----------- ----------
Total dividends and distributions (3.22) (2.17) (1.31) -- (3.14)
---------- ------- ------- ----------- ----------
Net asset value at end of period $ 41.69 $ 38.78 $ 35.19 $32.13 $41.40
========== ======= ======= =========== ==========
Total investment return (c) 16.89% 17.08% 13.84% 5.76%(d) 16.61%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 1.08% 0.51% 0.59%(b) 0.21%+ 0.81%
Net expenses 1.02% 1.13% 1.05% 1.09%+ 1.27%
Expenses (before reimbursement) 1.02% 1.11% 1.07% 1.12%+ 1.27%
Portfolio turnover rate 76% 100% 56% 64% 76%
Net assets at end of period (in 000's) $12,424 $15,583 $13,379 $ 34 $8,560
<Caption>
CLASS R2
------------------------------------
JANUARY 2,
2004**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
2006 2005 2004
Net asset value at beginning of period $35.03 $32.07 $30.38
------ ------ -----------
Net investment income (loss) 0.07(a) 0.07(a)(b) (0.01)(a)
Net realized and unrealized gain on
investments 5.57 4.20 1.70
------ ------ -----------
Total from investment operations 5.64 4.27 1.69
------ ------ -----------
Less dividends and distributions:
From net investment income -- -- --
From net realized gain on investments (2.13) (1.31) --
------ ------ -----------
Total dividends and distributions (2.13) (1.31) --
------ ------ -----------
Net asset value at end of period $38.54 $35.03 $32.07
====== ====== ===========
Total investment return (c) 16.80% 13.54% 5.56%(d)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.17% 0.34%(b) (0.04%)+
Net expenses 1.38% 1.30% 1.34% +
Expenses (before reimbursement) 1.36% 1.32% 1.37% +
Portfolio turnover rate 100% 56% 64%
Net assets at end of period (in 000's) $5,806 $2,122 $ 4
</Table>
<Table>
<Caption>
CLASS R3
--------------------------------
APRIL 28,
2006**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
2007 2006
Net asset value at beginning of period $38.49 $37.46
----------- -----------
Net investment income (loss) 0.17(a) (0.02)(a)
Net realized and unrealized gain on
investments 5.73 1.05
----------- -----------
Total from investment operations 5.90 1.03
----------- -----------
Less dividends and distributions:
From net investment income (0.02) --
From net realized gain on investments (3.06) --
----------- -----------
Total dividends and distributions (3.08) --
----------- -----------
Net asset value at end of period $41.31 $38.49
=========== ===========
Total investment return (c) 16.37% 2.75%(d)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.42% (0.10%)+
Net expenses 1.52% 1.72% +
Expenses (before reimbursement) 1.52% 1.73% +
Portfolio turnover rate 76% 100%
Net assets at end of period (in 000's) $ 256 $ 10
</Table>
<Table>
** Commencement of operations.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Net investment income (loss) and the ratio of net investment income (loss) includes $0.04
per share and 0.11%, respectively as a result of a special one time dividend from
Microsoft Corp.
(c) Total return is calculated exclusive of sales charges. Classes I, R1 and R2 are not
subject to sales charges.
(d) Total return is not annualized.
</Table>
22 MainStay MAP Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises nineteen funds (collectively referred to as the
"Funds"). These financial statements and notes relate only to MainStay MAP Fund
(the "Fund"), a diversified fund.
The Fund currently offers seven classes of shares. Class A shares, Class B
shares, Class C shares and Class I shares commenced on June 9, 1999. Class R1
shares and Class R2 shares commenced on January 2, 2004. Class R3 shares
commenced on April 28, 2006. Class A shares are offered at net asset value per
share plus an initial sales charge. No sales charge applies on investments of $1
million or more (and certain other qualified purchases) in Class A shares, but a
contingent deferred sales charge is imposed on certain redemptions of such
shares within one year of the date of purchase. Class B shares and Class C
shares are offered without an initial sales charge, although a declining
contingent deferred sales charge may be imposed on redemptions made within up to
six years of purchase of Class B shares and a 1% contingent deferred sales
charge may be imposed on redemptions made within one year of purchase of Class C
shares. Class I, Class R1, Class R2 and Class R3 shares are not subject to a
sales charge. As approved by the Board of Trustees in 1997, Class B shares
convert to Class A shares eight years after the date they were purchased. The
seven classes of shares bear the same voting (except for issues that relate
solely to one class), dividend, liquidation and other rights and conditions
except that Class B and Class C shares are subject to higher distribution fee
rates than Class A, Class R2 and Class R3 shares under a distribution plan
pursuant to Rule 12b-1 under the 1940 Act. Class I and Class R1 shares are not
subject to a distribution or service fee. Class R1, Class R2 and Class R3 shares
are authorized to pay to New York Life Investment Management LLC, its
affiliates, or third-party service providers, as compensation for services
rendered to shareholders of Class R1, Class R2 or Class R3 shares, a shareholder
service fee.
The Fund's investment objective is to seek long-term appreciation of capital.
The Fund also seeks to earn income, but this is a secondary objective.
The Fund invests in foreign securities, which carry certain risks that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country, industry or region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent or brokers selected by the Fund's Manager, as defined in Note 3,
whose prices reflect broker/dealer supplied valuations and electronic data
processing techniques, if such prices are deemed by the Fund's Manager to be
representative of market values, at the regular close of trading of the New York
Stock Exchange (generally 4:00 p.m. Eastern time) on each day the Fund is open
for business.
Equity securities are valued at the latest quoted sales prices as of the close
of trading on the New York Stock Exchange on each day the Fund is open for
business ("valuation date"). Securities that are not traded on the valuation
date are valued at the mean of the latest quoted bid and asked prices. Prices
normally are taken from the principal market in which each security trades.
Investments in mutual funds are valued at their net asset value as of the close
of the New York Stock Exchange on the date of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Board of Trustees to represent fair value.
Equity and non-equity securities which may be valued in this manner include, but
are not limited to: a security the trading for which has been halted or
suspended; a debt security that has recently gone into default and for which
there is not current market quotation; a security of an issuer that has entered
into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; a security where the trading on that security's principal market
is temporarily closed at a time when, under normal conditions, it would be open.
At October 31, 2007, the Fund held
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
securities with a value of $763,168 that were valued in such a manner.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. These events may include, but are not limited to, situations
relating to a single issue in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. Should the
Manager or Subadvisor, as defined in Note 3, conclude that such events may have
effected the accuracy of the last price reported on the local foreign market,
the Manager or Subadvisor may, pursuant to procedures adopted by the Fund,
adjust the value of the local price to reflect the impact on the price of such
securities as a result of such events. Additionally, international equity
securities are also fair valued whenever the movement of a particular index
exceeds certain thresholds. In such cases, the securities are fair valued by
applying factors provided by a third party vendor in accordance with the Fund's
policies and procedures.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
of net investment income and distributions of net realized capital and currency
gains, if any, annually. All dividends and distributions are reinvested in
shares of the Fund, at net asset value, unless the shareholder elects otherwise.
Dividends and distributions to shareholders are determined in accordance with
federal income tax regulations and may differ from generally accepted accounting
principles in the United States of America. Permanent book/tax differences
relating to income and gains are reclassified amongst undistributed net
investment income, accumulated net realized gain or loss and paid-in-capital.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities
purchased, other than short-term securities, for the Fund are accreted and
amortized, respectively, on the constant yield method over the life of the
respective securities or, in the case of a callable security, over the period to
the first date of call. Discounts and premiums on short-term securities are
accreted and amortized, respectively, on the straight line method. Income from
payment-in-kind securities is recorded daily based on the effective interest
method of accrual.
The investment income and realized and unrealized gains and losses on
investments of the Fund are allocated to separate classes of shares based upon
their relative net assets on the date the income is earned or realized and
unrealized gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B) on
page 25) are allocated to separate classes of shares pro rata based upon their
relative net assets value on the date the expenses are incurred. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) SECURITIES LENDING. In order to realize additional income the Fund may lend
its securities to broker-dealers and financial institutions. The loans are
collateralized by cash or securities at least equal at all times to the market
value of the securities loaned. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. The Fund may bear
the risk of delay in recovery of, or loss of rights in, the securities loaned
should the borrower of the securities experience financial difficulty. The Fund
receives compensation for lending its securities in the form of fees or it
retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(H) INDEMNIFICATIONS. In the normal course of business, the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred.
24 MainStay MAP Fund
Based on experience, management is of the view that the risk of loss in
connection with these potential indemnification obligations is remote. However,
there can be no assurance that material liabilities related to such obligations
will not arise in the future which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager") a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. NYLIM provides offices and conducts clerical, recordkeeping and
bookkeeping services, and is responsible for the financial and accounting
records required to be maintained by the Fund. NYLIM also pays the salaries and
expenses of all personnel affiliated with the Fund and all the operational
expenses that are not the responsibility of the Fund. Markston International LLC
and Institutional Capital Corp. (the "Subadvisors") each act as subadvisors to
the Fund and manage a portion of the Fund's assets, as designated by NYLIM from
time to time, subject to the oversight of NYLIM. Each Subadvisor is responsible
for the day-to-day portfolio management of the Fund with respect to its
allocated portion of the Fund's assets. Pursuant to the terms of the Subadvisory
Agreements between NYLIM and the Subadvisors, NYLIM pays for the services of the
Subadvisors.
The Fund is contractually obligated to pay NYLIM a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.75% on assets up to $1.0 billion and 0.70% on assets in
excess of $1.0 billion.
Effective March 1, 2007, NYLIM has entered into a written expense limitation
agreement under which it has agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses (total annual operating expenses
excluding taxes, interest, litigation, extraordinary expenses, and brokerage and
other transaction expenses relating to the purchase or sale of portfolio
investments) do not exceed the following amounts of average daily net assets for
each class: Class A, 1.35%; Class B, 2.10%; Class C, 2.10%; Class I, 0.98%;
Class R1, 1.08%; Class R2, 1.33% and Class R3, 1.58%. This expense limitation
may be modified or terminated only with the approval of the Board of Trustees.
NYLIM may recoup the amount of any management fee waivers or expense
reimbursements from the Fund pursuant to the agreement if such action does not
cause the Fund to exceed existing expense limitations and the recoupment is made
within three years after the year in which NYLIM incurred the expense.
For the year ended October 31, 2007, NYLIM earned fees from the Fund in the
amount of $12,178,588. It was unnecessary for NYLIM to reimburse the Fund for
expenses for the year ended October 31, 2007.
Prior to March 1, 2007, NYLIM had an agreement in place under which it had
agreed to waive a portion of the Fund's management fee or reimburse the expenses
of the Fund so that the Fund's total ordinary operating expenses did not exceed
1.35% of the Fund's average daily net assets for its Class A shares. NYLIM also
applied an equivalent waiver or reimbursement, in an equal amount of basis
points, to the other share classes of the Fund.
State Street Bank & Trust Company ("SSBT"), One Lincoln Street, Boston,
Massachusetts, 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with NYLIM. These services include calculating
daily net asset values of the Fund, maintaining general ledger and sub-ledger
accounts for the calculation of the Fund's respective net asset values, and
assisting NYLIM in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, SSBT is compensated by
NYLIM.
(B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has a Distribution Agreement with NYLIFE Distributors LLC (the
"Distributor"), an indirect wholly-owned subsidiary of New York Life. The Fund,
with respect to Class A, Class B, Class C, Class R2 and Class R3 shares, has
adopted distribution plans (the "Plans") in accordance with the provisions of
Rule 12b-1 under the 1940 Act.
Pursuant to the Class A and Class R2 Plans, the Distributor receives a monthly
distribution fee from the Fund at an annual rate of 0.25% of the average daily
net assets of the Fund's Class A and Class R2 shares, which is an expense of the
Class A and Class R2 shares of the Fund for distribution or service activities
as designated by the Distributor. Pursuant to the Class B and Class C Plans, the
Fund pays the Distributor a monthly distribution fee, which is an expense of the
Class B and Class C shares of the Fund, at the annual rate of 0.75% of the
average daily net assets of the Fund's Class B and Class C shares. The Plans
provide that the Class B and Class C shares of the Fund also incur a service fee
at the annual rate of 0.25% of the average daily net asset value of the Class B
and Class C shares of the Fund. Pursuant to the Class R3 Plan, the Distributor
receives a monthly distribution fee from the Fund at the annual rate of 0.50% of
the average daily net assets of the Fund's Class R3 shares, which is an expense
of the Class R3 shares of the Fund for distribution or service activities as
designated by the Distributor. Class I and Class R1 shares are not subject to a
distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts
www.mainstayfunds.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
actually expended by the Distributor for distribution of the Fund's shares and
service activities.
In accordance with the Shareholder Services Plans for the Class R1, Class R2 and
Class R3 shares, the Manager has agreed to provide, through its affiliates or
independent third parties, various shareholder and administrative support
services to shareholders of the Class R1, Class R2 and Class R3 shares. For its
services, the Manager is entitled to a Shareholder Service Fee accrued daily and
paid monthly at an annual rate of 0.10% of the average daily net assets
attributable to the Class R1, Class R2 and Class R3 shares.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $322,025 for the year
ended October 31, 2007. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $7,396, $424,652 and $29,993, respectively, for the year ended October
31, 2007.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund, for the year ended October 31, 2007,
amounted to $3,134,032.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts, effective March 1, 2007. Shareholders with an account
balance of less than $1,000 are charged an annual per account fee of $20
(assessed semi-annually).
(F) CAPITAL. At October 31, 2007, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $ 382 0.0*%
- ------------------------------------------------------------
Class C 184 0.0*
- ------------------------------------------------------------
Class I 87,609,408 20.0
- ------------------------------------------------------------
Class R1 1,648 0.0*
- ------------------------------------------------------------
Class R2 1,632 0.0*
- ------------------------------------------------------------
Class R3 11,954 4.7
- ------------------------------------------------------------
</Table>
*Less than one-tenth of a percent.
(G) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2007, these fees, which are included in professional fees
shown on the Statement of Operations, were $63,252.
The Fund pays the Manager a monthly fee for certain pricing and recordkeeping
services provided under the Accounting Agreement at the annual rate of 1/20 of
1% for the first $20 million of average monthly net assets, 1/30 of 1% of the
next $80 million of average monthly net assets and 1/100 of 1% of any amount in
excess of $100 million of average monthly net assets. Fees for these services
provided to the Fund by the Manager amounted to $193,504 for the year ended
October 31, 2007.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2007, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$110,447,761 $100,668,687 $ -- $295,892,999 $507,009,447
-------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized appreciation is
primarily due to wash sale deferrals and real estate investment trust income.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income, accumulated net realized gain
on investments and additional paid-in-capital, arising from permanent
differences; net assets at October 31, 2007 are not affected.
<Table>
<Caption>
ACCUMULATED NET ACCUMULATED NET
INVESTMENT REALIZED GAIN (LOSS) ADDITIONAL
INCOME (LOSS) ON INVESTMENTS PAID-IN-CAPITAL
$ (140,783) $140,783 $ --
--------------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to real estate investment
trust gain (loss), reclassifications of distributions and partnership income
adjustments.
The tax character of distributions paid during the years ended October 31, 2007
and October 31, 2006, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2007 2006
Distributions paid from:
Ordinary Income $ 32,717,761 $34,573,479
Long-Term Capital Gains 92,528,306 45,058,082
- ----------------------------------------------------------------
$125,246,067 $79,631,561
- ----------------------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
SSBT is the custodian of cash and securities of the Fund. Custodial fees are
charged to the Fund based on the market value of securities in the Fund and the
number of certain cash transactions incurred by the Fund.
26 MainStay MAP Fund
NOTE 6--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. These funds pay a commitment fee, at an annual rate of .060% of the
average commitment amount, regardless of usage, to The Bank of New York, which
acts as agent to the syndicate. Such commitment fees are allocated among the
funds based upon net assets and other factors. Interest on any revolving credit
loan is charged based upon the Federal Funds Advances rate. There were no
borrowings made or outstanding on the line of credit during the year ended
October 31, 2007.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2007, purchases and sales of securities, other
than short-term securities, were $1,228,137 and $1,199,097, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 4,359 $ 169,215
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,025 37,604
Shares redeemed (3,775) (146,594)
----------------------
Net increase in shares outstanding
before conversion 1,609 60,225
Shares converted from Class B (See Note
1) 427 16,643
----------------------
Net increase 2,036 $ 76,868
======================
Year ended October 31, 2006:
Shares sold 4,181 $ 151,664
Shares issued to shareholders in
reinvestment of dividends and
distributions 540 18,769
Shares redeemed (3,269) (118,817)
----------------------
Net increase in shares outstanding
before conversion 1,452 51,616
Shares converted from Class B (See Note
1) 1,928 67,091
----------------------
Net increase 3,380 $ 118,707
======================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 1,759 $ 48,662
Shares issued to shareholders in
reinvestment of dividends and
distributions 772 26,648
Shares redeemed (2,040) (59,264)
---------------------
Net increase in shares outstanding
before conversion 491 16,046
Shares reacquired upon conversion into
Class A (See Note 1) (454) (16,643)
---------------------
Net increase (decrease) 37 $ (597)
=====================
Year ended October 31, 2006:
Shares sold 1,361 $ 46,980
Shares issued to shareholders in
reinvestment of dividends and
distributions 680 22,482
Shares redeemed (1,876) (64,516)
---------------------
Net increase (decrease) in shares
outstanding before conversion 165 4,946
Shares reacquired upon conversion into
Class A (See Note 1) (2,024) (67,091)
---------------------
Net decrease (1,859) $(62,145)
=====================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 2,472 $ 90,127
Shares issued to shareholders in
reinvestment of dividends and
distributions 460 15,898
Shares redeemed (1,116) (40,778)
---------------------
Net increase 1,816 $ 65,247
=====================
Year ended October 31, 2006:
Shares sold 2,076 $ 71,646
Shares issued to shareholders in
reinvestment of dividends and
distributions 280 9,268
Shares redeemed (1,043) (36,010)
---------------------
Net increase 1,313 $ 44,904
=====================
</Table>
www.mainstayfunds.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 2,817 $111,404
Shares issued to shareholders in
reinvestment of dividends and
distributions 783 29,245
Shares redeemed (2,358) (93,512)
---------------------
Net increase 1,242 $ 47,137
=====================
Year ended October 31, 2006:
Shares sold 2,005 $ 73,750
Shares issued to shareholders in
reinvestment of dividends and
distributions 559 19,682
Shares redeemed (2,426) (89,674)
---------------------
Net increase 138 $ 3,758
=====================
</Table>
<Table>
<Caption>
CLASS R1 SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 86 $3,316
Shares issued to shareholders in
reinvestment of dividends and
distributions 35 1,313
Shares redeemed (225) (8,834)
------------------
Net decrease (104) $(4,205)
==================
Year ended October 31, 2006:
Shares sold 73 $2,661
Shares issued to shareholders in
reinvestment of dividends and
distributions 24 819
Shares redeemed (75) (2,723)
------------------
Net increase 22 $ 757
==================
</Table>
<Table>
<Caption>
CLASS R2 SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 191 $7,511
Shares issued to shareholders in
reinvestment of dividends and
distributions 13 476
Shares redeemed (148) (5,714)
------------------
Net increase 56 $2,273
==================
Year ended October 31, 2006:
Shares sold 117 $4,309
Shares issued to shareholders in
reinvestment of dividends and
distributions 4 129
Shares redeemed (31) (1,105)
------------------
Net increase 90 $3,333
==================
</Table>
<Table>
<Caption>
CLASS R3 SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 6 $ 248
Shares issued to shareholders in
reinvestment of dividends and
distributions -- (a) 1
Shares redeemed (--)(a) (16)
------------------
Net increase 6 $ 233
==================
Year ended October 31, 2006:
Shares sold -- (a) $ 10
------------------
Net increase -- (a) $ 10
==================
</Table>
(a) Less than one thousand.
NOTE 9--OTHER MATTERS:
In 2004 the Securities and Exchange Commission ("SEC") raised concerns relating
to a guarantee provided to shareholders of the MainStay Equity Index Fund and
the fees and expenses of that Fund, as well as the related guaranteed disclosure
to that fund's shareholders. Discussions have been held with the SEC concerning
a possible resolution of this matter. There can be no assurance at this time as
to the outcome of these efforts.
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS:
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation becomes effective for the Fund's 2008 fiscal
year, and is to be applied to all open tax years as of the date of
effectiveness. Based on Management's analysis, the determination has been made
that the adoption of the interpretation on November 1, 2007, did not have an
impact on the Fund's financial statements upon adoption. Management continually
reviews the Fund's tax positions and such conclusions under the Interpretation
based on factors, including, but not limited to, ongoing analyses of tax laws,
regulations and interpretations, thereof.
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years.
28 MainStay MAP Fund
The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2007, the Fund does not believe the
adoption of SFAS No. 157 will impact the amounts reported in the Fund's
financial statements. However, additional disclosures may be required about the
inputs used to develop the measurements and the effect of certain measurements
reported in the financial statements for a fiscal period.
www.mainstayfunds.com 29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay MAP Fund ("the Fund"), one of the
funds constituting The MainStay Funds, as of October 31, 2007, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years or periods in the four-year period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the periods presented through October 31,
2003, were audited by other auditors, whose report dated December 18, 2003,
expressed an unqualified opinion thereon.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2007, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay MAP Fund of The MainStay Funds as of October 31, 2007, the results of
its operations for the year then ended, the changes in its net assets for each
of the years in the two-year period then ended, and financial highlights for
each of the years in the four-year period then ended, in conformity with U.S.
generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 20, 2007
30 MainStay MAP Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with New York Life Investment Management LLC (the "Manager") and the
Subadvisory Agreements (each of the Management Agreement and the Subadvisory
Agreements, an "Agreement") between the Manager and Markston International LLC
("Markston") and between the Manager and Institutional Capital LLC ("ICAP"), a
wholly-owned indirect subsidiary of New York Life Investment Management Holdings
LLC ("NYLIM Holdings"), an affiliate of the Manager (each of Markston and ICAP,
a "Subadvisor"), at a meeting held on May 22 and 23, 2007.
In connection with the approval of each Agreement, the Trustees reviewed a
significant amount of a wide variety of information that they had requested and
received from the Manager and the Subadvisors, and data and analysis from an
outside data provider and a third party consultant. The Trustees considered
various industry trends and regulatory developments in their deliberations. In
considering approval of each Agreement, and in evaluating the fairness of the
compensation to be paid by the Fund, the Trustees met both as a full Board and
in executive session with no Interested Trustee present, in advance of the
meeting at which the Agreements were approved, and they considered a number of
factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and each Subadvisor. The Trustees reviewed the services
that the Manager and the Subadvisors have provided historically to the Fund, and
also generally to other series of the Trust. Among other services, the Manager's
services have included investment management services, including monitoring and
evaluating the Subadvisors' investment programs and investment results with
respect to the Fund, and each Subadvisor's compliance with the Fund's investment
policies and restrictions, and administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. Each Subadvisor is responsible for the day-to-day portfolio
management of a portion of the assets of the Fund, including determining the
composition of the portfolio of its portion of the Fund's assets and the timing
of the Fund's execution of the purchase and sale of assets, and its other
services include, among other services, providing reports to the Manager and
reviewing certain aspects of Fund filings. The Trustees considered, among other
things, the Manager's and each Subadvisor's management, personnel, resources,
operations and portfolio management capabilities. The Board reviewed information
about each Subadvisor's brokerage practices, including with respect to best
execution of portfolio trades. The Trustees noted that the Fund's assets
represented a significant portion of Markston's assets under management, and a
smaller portion of ICAP's assets under management. The Trustees considered the
Manager's supervision of the Fund's service providers and its attention to the
compliance program of the Trust, the Manager, each Subadvisor and certain other
service providers, as well as each Subadvisor's attention to its compliance
program. The Trustees noted the generally favorable results of a third party
review of the services and communications that NYLIM Service Company LLC, an
affiliate of the Manager and the Subadvisor, has provided to Trust shareholders.
The Board also considered the proposed subadvisory fee rate payable by the
Manager to each Subadvisor under its Subadvisory Agreement. The Board noted that
the subadvisory fee arrangement between the Manager and each Subadvisor included
breakpoints based on the amount of assets in the Subadvisor's portion of the
Fund's portfolio. The Board also considered and compared the rate of each
Subadvisor's proposed subadvisory fee to advisory fees paid by funds identified
by fund data services as comparable to the Fund. Based on these considerations,
the Board concluded that each Subadvisor's proposed subadvisory fee rate under
its Agreement was reasonable in comparison to other subadvisory fee rates.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board
took into consideration information it received on, among other things, the
favorable long- and short-term performance of the Fund under the monitoring of
the Manager, the favorable performance of Markston, and ICAP's favorable
performance in managing its portion of the Fund's assets. The Board further
considered the experience level, tenure and compensation of the management team
of each Subadvisor. The Board concluded that the investment program of each
Subadvisor appeared appropriately to complement the investment program of the
other Subadvisor.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates, and the subadvisory fee payments
made by the Manager to the Subadvisor. The Trustees were provided information
that indicated that the profitability to the Manager and its affiliates from the
Management Agreement with respect to the Fund and from the overall relationship
with the Trust was low. The Trustees considered other
www.mainstayfunds.com 31
benefits that the Manager and its affiliates receive from the relationship with
the Trust, including benefits that NYLIFE Distributors and MainStay Shareholder
Services receive in exchange for services they provide to the Funds, and certain
benefits from soft dollar arrangements. The Trustees acknowledged certain
benefits to the reputation of the Manager and the Trust from their association
with each other. The Board considered that, in a transaction that closed on June
30, 2006, ICAP had entered into an agreement with NYLIM Holdings, at which time
ICAP became an affiliated person of the Manager.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They considered that, across the Trust
(though not every series or share class), gross transfer agency fees tended to
be relatively high and, therefore, adversely affected gross expense ratios.
Noting that the Trust historically permitted smaller investor accounts, the
Trustees considered measures that had been recently implemented that were
intended to increase the average size of shareholder accounts, including
generally higher investment minimums, and small account fees, and the Trustees
considered potential benefits to the Manager and its affiliates arising from
such measures.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the Manager's willingness to implement a
contractual breakpoint that would reduce the Fund's management fee at asset
levels above the breakpoint, and the fact that the breakpoint was intended to
provide that shareholders would share in benefits from economies of scale
obtained through the growth in the Fund's assets. The Trustees noted that the
Fund's management fee rate had been reduced by the breakpoint schedule
applicable to the Fund. The Trustees reviewed information about the potential
effect of asset growth on Fund expenses, the difficulty of forecasting its
effect on the profitability of the Manager and its affiliates, and the
management fee breakpoints applicable to the Fund and certain other funds. It
was noted that, to the extent the Fund's gross expenses currently were higher
than its net expenses, the reduction of the Fund's gross expenses through the
achievement of economies of scale might benefit the Manager by reducing the
expenses the Manager must reimburse to the Fund rather than directly benefiting
the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by the
Fund, the Trustees evaluated factors such as the fees and expenses borne by
other registered funds in the market pursuing strategies generally similar to
the Fund's. Although the Trustees received fee and expense data with respect to
other clients of the Manager generally, they were advised that no other client
of the Manager had an investment strategy similar to that of the Fund. The
Trustees considered the current and proposed contractual and net management
fees, its anticipated gross and net expense ratio, and various components of the
expense ratio, in comparison to other funds in comparison groupings. The
Trustees generally acknowledged the historical relationships among the Manager,
the Subadvisor and the Trust and the likely difficulties in implementing an
alternative to the investment management arrangement between the Trust and the
Manager. The Trustees noted the Manager's agreement to maintain the limit on the
Fund's net expenses at a certain level.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings, with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. This summary set out
above describes the most important, but not all, of the factors considered by
the Trustees in considering each Agreement. On the basis of their review, a
majority of the Trustees and a majority of the Non-Interested Trustees concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the judgment of a
majority of the Trustees and a majority of the Non-Interested Trustees that
approval of each Agreement was in the best interests of the Fund and its
shareholders.
32 MainStay MAP Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advise shareholders within
60 days of the Fund's fiscal year end (October 31, 2007) as to the federal tax
status of dividends paid by the Fund during such fiscal year. Accordingly, the
Fund paid long-term capital gain distributions of $92,528,306.
The dividends paid by the Fund during the fiscal year ended October 31, 2007,
should be multiplied by 26.0% to arrive at the amount eligible for qualified
dividend income, 19.8% for qualified interest income and 21.1% for the corporate
dividends received deduction.
In January 2008, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2007. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2007.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
or (iii) on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 1-800-MAINSTAY (1-800-624-6782). You also can obtain and review copies
of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC
(information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330).
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of The MainStay Funds (the
"Trust") was held on May 4, 2007, at the offices of New York Life Investment
Management LLC in Parsippany, New Jersey. The purpose of the meeting was to
elect the following individuals to the Board of Trustees of the Trust:
- Susan B. Kerley
- Alan R. Latshaw
- Peter Meenan
- Richard H. Nolan, Jr.
- Richard S. Trutanic
- Roman L. Weil
- John A. Weisser
- Brian A. Murdock (Interested Trustee)
There are no other Trustees of the Trust.
No other business came before the special meeting. The proposal to elect
Trustees was passed by the shareholders of the Fund as shown below:
<Table>
<Caption>
VOTES VOTES
MAP FUND FOR WITHHELD ABSTENTIONS TOTAL
Susan B. Kerley 26,971,656.478 73,047.887 38,954.000 27,083,658.365
- ----------------------------------------------------------------------------
Alan R. Latshaw 26,976,213.830 68,490.535 38,954.000 27,083,658.365
- ----------------------------------------------------------------------------
Peter Meenan 26,977,354.541 67,349.824 38,954.000 27,083,658.365
- ----------------------------------------------------------------------------
Richard H.
Nolan, Jr. 26,947,223.510 97,480.855 38,954.000 27,083,658.365
- ----------------------------------------------------------------------------
Richard S.
Trutanic 26,940,863.454 103,840.911 38,954.000 27,083,658.365
- ----------------------------------------------------------------------------
Roman L. Weil 26,945,930.903 98,773.462 38,954.000 27,083,658.365
- ----------------------------------------------------------------------------
John A. Weisser 26,976,061.483 68,642.882 38,954.000 27,083,658.365
- ----------------------------------------------------------------------------
Brian A. Murdock 26,974,592.196 70,112.169 38,954.000 27,083,658.365
- ----------------------------------------------------------------------------
</Table>
This resulted in approval of the proposal.
www.mainstayfunds.com 33
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Pursuant to
notice, a Special Meeting of Shareholders of the Trust was held on May 4, 2007,
at NYLIM's offices in Parsippany, New Jersey. The Trustees listed below were
elected to serve the Trust effective June 7, 2007.
Each Trustee serves until his or her successor is elected and qualified or until
his or her resignation, death or removal. The Retirement Policy provides that a
Trustee shall tender his or her resignation upon reaching age 72. A Trustee
reaching the age of 72 may continue for additional one-year periods with the
approval of the Board's Nominating and Governance Committee, except that no
Trustee shall serve on the Board past his or her 75th birthday. Officers serve a
term of one year and are elected annually by the Trustees. The business address
of each Trustee and officer listed below is 51 Madison Avenue, New York, New
York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF FUNDS
POSITION(S) HELD IN FUND COMPLEX
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
BRIAN A. MURDOCK Indefinite; Member of the Board of Managers 73 Trustee, Eclipse Funds since
3/14/56 Trustee and Chief and President (since 2004) and June, 2007 (3 funds); Director,
Executive Officer Chief Executive Officer (since Eclipse Funds Inc. since June
since 2006 2006), New York Life Investment 2007 (22 funds); Director,
Management LLC and New York MainStay VP Series Fund, Inc.,
Life Investment Management since 2006 (24 portfolios);
Holdings LLC; Senior Vice Director, ICAP Funds, Inc.,
President, New York Life since 2006 (3 funds)
Insurance Company (since 2004);
Chairman of the Board and
President, NYLIFE Distributors
LLC (since 2004); Member of the
Board of Managers, NYLCAP
Manager LLC and Madison Capital
Funding LLC (since 2004),
MacKay Shields LLC and
Institutional Capital LLC
(since 2006), and McMorgan &
Company LLC (since 2007); Chief
Executive Officer, Eclipse
Funds and Eclipse Funds Inc.
(since 2006); Chairman (2006 to
2007) and Director and Chief
Executive Officer (since 2006),
MainStay VP Series Fund, Inc.;
Director and Chief Executive
Officer, ICAP Funds, Inc.
(since 2006); Chief Investment
Officer, MLIM Europe and Asia
(2001 to 2003); President of
Merrill Japan and Chairman of
MLIM's Pacific Region (1999 to
2001)
-----------------------------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow Capital
Management, Inc., McMorgan & Company LLC, NYLIFE Securities Inc. and/or NYLIFE
Distributors LLC, as described in detail above in the column "Principal
Occupation(s) During Past Five Years."
34 MainStay MAP Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. KERLEY Indefinite; Partner, Strategic Management 73 Chairman since 2005 and Trustee
8/12/51 Chairman and Advisors LLC (since 1990) since 2000, Eclipse Funds (3
Trustee since funds); Chairman since 2005 and
June 2007 Director since 1990, Eclipse
Funds Inc. (22 funds); Chairman
and Director, ICAP Funds, Inc.,
since 2006 (3 funds); Chairman
and Director, MainStay VP
Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
Legg Mason Partners Funds,
Inc., since 1991 (30
portfolios)
----------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & Young 73 Trustee, Eclipse Funds since
3/27/51 Trustee and Audit LLP (2002 to 2003); Partner, June 2007 (3 funds); Director,
Committee Arthur Andersen LLP (1989 to Eclipse Funds Inc. since June
Financial Expert 2002); Consultant to the Audit 2007 (22 funds); Director, ICAP
since 2006 and Compliance Committee of The Funds, Inc., since June 2007 (3
MainStay Funds (2004 funds); Director, MainStay VP
to 2006) Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
State Farm Associates Funds
Trusts since 2005 (3
portfolios); Trustee, State
Farm Mutual Fund Trust since
2005 (15 portfolios); Trustee,
State Farm Variable Product
Trust since 2005 (9 portfolios)
----------------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds since
12/5/41 Trustee since President and Chief Executive 2002 (3 funds); Director,
June 2007 Officer, Babson-United, Inc. Eclipse Funds Inc. since 2002
(financial services firm) (2000 (22 funds); Director, ICAP
to 2004); Independent Funds, Inc., since 2006 (3
Consultant (1999 to 2000); Head funds); Director, MainStay VP
of Global Funds, Citicorp (1995 Series Fund, Inc., since June
to 1999) 2007 (24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 73 Trustee, Eclipse Funds since
NOLAN, JR. Trustee since Management; President--Shields/ June 2007 (3 funds); Director,
11/16/46 June 2007 Alliance, Alliance Capital Eclipse Funds Inc. since June
Management (1994 to 2004) 2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 2006
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman (since 1990) and Chief 73 Trustee, Eclipse Funds since
TRUTANIC Trustee since Executive Officer (1990 to June 2007 (3 funds); Director,
2/13/52 1994 1999), Somerset Group Eclipse Funds Inc. since June
(financial advisory firm); 2007 (22 funds); Director, ICAP
Managing Director and Advisor, Funds, Inc., since June 2007 (3
The Carlyle Group (private funds); Director, MainStay VP
investment firm) (2002 to Series Fund, Inc., since June
2004); Senior Managing Director 2007 (24 portfolios)
and Partner, Groupe Arnault
S.A. (private investment firm)
(1999 to 2002)
----------------------------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 35
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEE
ROMAN L. WEIL Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds since
5/22/40 Trustee and Audit Accounting, Graduate School of June 2007 (3 funds); Director,
Committee Business, University of Eclipse Funds Inc. since June
Financial Expert Chicago; President, Roman L. 2007 (22 funds); Director, ICAP
since June 2007 Weil Associates, Inc. Funds, Inc., since June 2007 (3
(consulting firm) funds); Director, MainStay VP
Series Fund, Inc., since 1994
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 73 Trustee, Eclipse Funds since
10/22/41 Trustee since Salomon Brothers, Inc. (1971 to June 2007 (3 funds); Director,
June 2007 1995) Eclipse Funds Inc. since June
2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 1997
(24 portfolios); Trustee,
Direxion Funds (69 funds) and
Direxion Insurance Trust (45
funds) since March 2007
----------------------------------------------------------------------------------------------------------------------
</Table>
Terry L. Lierman resigned as Trustee of the Trust effective May 31, 2007. Edward
J. Hogan, John B. McGuckian and Donald E. Nickelson resigned as Trustees of the
Trust effective June 7, 2007.
At a meeting of the Board of Trustees held on June 7 and 8, 2007, the following
individuals were appointed to serve as Officers of the Trust effective June 7,
2007:
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ROBERT A. Chief Legal Senior Managing Director, General Counsel and Secretary, New
ANSELMI Officer since York Life Investment Management LLC (including predecessor
10/19/46 2004 advisory organizations) (since 2000); Secretary (since 2001)
and General Counsel (since 2004), New York Life Investment
Management Holdings LLC; Senior Vice President, New York
Life Insurance Company (since 2000); Vice President and
Secretary, McMorgan & Company LLC (since 2001); Secretary,
NYLIM Service Company LLC (since 2005), NYLCAP Manager LLC
(since 2004), Madison Capital Funding LLC (since 2002), and
Institutional Capital LLC (since 2006); Chief Legal Officer,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), McMorgan Funds (since 2005) and
ICAP Funds, Inc. (since 2006); Managing Director and Senior
Counsel, Lehman Brothers Inc. (1998 to 1999); General
Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998)
-------------------------------------------------------------------------------------------------
JACK R. Treasurer and Managing Director, New York Life Investment Management LLC
BENINTENDE Principal (since June 2007); Treasurer and Principal Financial and
5/12/64 Financial and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
Accounting MainStay VP Series Fund, Inc., and ICAP Funds, Inc. (since
Officer since June 2007); Vice President, Prudential Investments (2000 to
June 2007 2007); Assistant Treasurer, JennisonDryden Family of Funds,
Target Portfolio Trust, The Prudential Series Fund and
American Skandia Trust (2006 to 2007); Treasurer and
Principal Financial Officer, The Greater China Fund (2007)
-------------------------------------------------------------------------------------------------
STEPHEN P. President since Senior Managing Director and Chief Marketing Officer, New
FISHER March 2007 York Life Investment Management LLC (since 2005); Managing
2/22/59 Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since March 2007); Managing Director, UBS
Global Asset Management (1999 to 2003)
-------------------------------------------------------------------------------------------------
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration predecessor advisory organizations) (since 2000); Executive
2/8/59 since 2005 Vice President, New York Life Trust Company (since 2006);
Vice President--Administration, Eclipse Funds, Eclipse Funds
Inc. and MainStay VP Series Fund, Inc. (since 2005) and ICAP
Funds, Inc. (since 2006)
-------------------------------------------------------------------------------------------------
</Table>
36 MainStay MAP Fund
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Senior Managing Director and Chief Compliance Officer (since
MICUCCI President and 2006) and Managing Director and Chief Compliance Officer
12/16/65 Chief Compliance (2003 to 2006), New York Life Investment Management LLC and
Officer since New York Life Investment Management Holdings LLC; Senior
2006 Managing Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE Distributors
LLC; Chief Compliance Officer, NYLCAP Manager LLC (since
2006); Senior Vice President and Chief Compliance Officer,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund,
Inc., and ICAP Funds, Inc. (since 2006); Vice President--
Compliance, Eclipse Funds, Eclipse Funds Inc. and MainStay
VP Series Fund, Inc. (2004 to 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002)
-------------------------------------------------------------------------------------------------
MARGUERITE E.H. Secretary since Managing Director and Associate General Counsel, New York
MORRISON* 2004 Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC (since
2005); Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP Funds,
Inc. (since 2006); Chief Legal Officer--Mutual Funds and
Vice President and Corporate Counsel, The Prudential
Insurance Company of America (2000 to 2004)
-------------------------------------------------------------------------------------------------
</Table>
* In addition to serving as Secretary to the Trust, effective January 1, 2008,
Marguerite E.H. Morrison will assume the role of Chief Legal Officer to the
Trust.
Arphiela Arizmendi resigned as Treasurer and Principal Financial and Accounting
Officer of the Trust effective June 7, 2007.
Christopher O. Blunt resigned as President of the Trust effective March 12,
2007.
Alan J. Kirshenbaum resigned as Senior Vice President of the Trust effective
March 19, 2007.
www.mainstayfunds.com 37
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay 130/30 Core Fund
MainStay 130/30 Growth Fund
MainStay All Cap Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay 130/30 High Yield Fund(2)
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Institutional Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Principal Preservation Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay 130/30 International Fund
MainStay Global High Income Fund
MainStay ICAP International Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
RETIREMENT FUNDS
MainStay Retirement 2010 Fund
MainStay Retirement 2020 Fund
MainStay Retirement 2030 Fund
MainStay Retirement 2040 Fund
MainStay Retirement 2050 Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
New York, New York
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
Chicago, Illinois
MACKAY SHIELDS LLC(3)
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
MCMORGAN & COMPANY LLC(3)
San Francisco, California
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
This page intentionally left blank
(NEW YORK LIFE INVESTMENT MANAGEMENT LLC LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2007 NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A011872 (RECYCLE LOGO) MS329-07 MSMP11-12/07
30
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MID CAP GROWTH FUND
Message from the President
and
Annual Report
October 31, 2007
MESSAGE FROM
THE PRESIDENT
The 12-month period ended October 31, 2007, was a dynamic one for mutual fund
investors. U.S. equity markets generally advanced, with growth stocks out-
performing value stocks at all capitalization levels. Although past performance
is no guarantee of future results, international stocks as a whole provided even
stronger returns for U.S. investors.
The progress of the equity markets, however, was far from steady. In February,
weakness in Asian markets led to sharp price declines around the globe. The
correction caused many investors to reconsider whether China and other emerging
economies could sustain their rapid growth. Fortunately, strong
corporate-earnings reports and positive economic news helped the stock market
regain its footing.
In July and August, difficulties in the subprime-mortgage market led to another
stock-market correction. A number of high-profile mortgage originators either
closed their doors or were sold to larger entities. Other leading financial
services firms faced major write-offs because of subprime-mortgage exposure.
The Federal Open Market Committee (FOMC) took prompt action to increase
liquidity and stabilize the financial markets by lowering the discount rate and
the federal funds target rate during the reporting period. These Federal Reserve
moves helped calm investor concerns, and the stock market generally advanced
from August 16, 2007, the date of an unscheduled FOMC meeting, through the end
of October 2007.
Difficulties in the subprime-mortgage market led to a "flight to quality," or a
general movement toward fixed-income securities that carry lower risk. As demand
for short- and intermediate-term Treasury securities increased, yields fell
across much of the maturity spectrum. Yields rose, however, on 20-and 30-year
Treasury bonds, and the yield curve steepened during the 12-month reporting
period.
High-yield bonds rallied from November 2006 through May 2007. But in June and
July, the yield differences--or spreads--between high-yield bonds and comparable
Treasury securities began to widen. At the end of October 2007, these spreads
were wider than when the reporting period began, making high-yield securities
more attractive to investors willing to accept higher risk.
To help investors address the challenges of today's ever-changing markets, New
York Life Investment Management LLC provides access to seven institutional
investment boutiques, each with its own proprietary research and investment
culture. As advisors and subadvisors to MainStay Funds, these boutiques bring a
wealth of experience and market insight to our shareholders. The portfolio
managers of each MainStay Fund seek to consistently apply time-tested investment
principles across a wide variety of market environments.
The report that follows provides more specific information about the market
forces and investment decisions that affected your investment in MainStay Funds
from November 1, 2006, through October 31, 2007. Please read the report
carefully. As you do, bear in mind that this annual report reflects just a short
segment of your lifetime investment journey. We look forward to continuing to
work with you, wherever that journey may lead.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MID CAP GROWTH FUND
MainStay Funds
Annual Report
October 31, 2007
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 10
- --------------------------------------------------------------------------------
Financial Statements 13
- --------------------------------------------------------------------------------
Notes to Financial Statements 18
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 24
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 25
- --------------------------------------------------------------------------------
Federal Income Tax Information 27
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 27
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 27
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 27
- --------------------------------------------------------------------------------
Trustees and Officers 28
</Table>
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT
MONTH-END PERFORMANCE INFORMATION, PLEASE CALL 1-800-MAINSTAY (1-800-624-6782)
OR VISIT WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 18.62% 18.77% 5.89%
Excluding sales charges 25.53 20.12 6.77
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY MID CAP GROWTH FUND
CLASS A RUSSELL MIDCAP GROWTH INDEX
---------------------------- ---------------------------
1/2/01 9450 10000
7078 6945
5916 5722
7777 7970
8590 8669
10773 10048
11784 11506
10/31/07 14792 13774
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 19.51% 19.05% 5.99%
Excluding sales charges 24.51 19.25 5.99
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY MID CAP GROWTH FUND
CLASS B RUSSELL MIDCAP GROWTH INDEX
---------------------------- ---------------------------
1/2/01 10000 10000
7440 6945
6170 5722
8050 7970
8820 8669
10980 10048
11850 11506
10/31/07 14879 13774
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 23.53% 19.23% 5.97%
Excluding sales charges 24.53 19.23 5.97
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY MID CAP GROWTH FUND
CLASS C RUSSELL MIDCAP GROWTH INDEX
---------------------------- ---------------------------
1/2/01 10000 10000
7440 6945
6170 5722
8050 7970
8820 8669
10990 10048
11940 11506
10/31/07 14869 13774
</Table>
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect maximum applicable sales charges explained in this paragraph, change in
share price, and reinvestment of dividend and capital-gain distributions. The
graphs assume an initial investment of $10,000 and reflect the deduction of all
sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase and have an annual 12b-1 fee of 1.00%.
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee and are generally available to corporate and institutional investors
with a minimum initial investment of $5 million. Class R3 shares are sold with
no initial sales charge or CDSC, have an annual 12b-1 fee of .50% and are
available in certain individual retirement accounts or in certain retirement
plans. Performance figures reflect certain fee waivers and/or expense
limitations, without which total returns may have been lower. These fee waivers
and/or expense limitations are contractual and may be modified or terminated
only with the approval of the Board of Trustees. The Manager may recoup the
amount of certain management fee waivers or expense reimbursements from the Fund
pursuant to the contract if such action does not cause the Fund to exceed
existing expense limitations and the recoupment is made within three years after
the year in which the Manager incurred the expense. From inception through
3/28/05 performance of Class I shares (first offered 3/29/05) includes the
historical performance of Class A shares adjusted to reflect the applicable
sales charge (or CDSC), fees, estimated expenses and fee waivers/expense
limitations of Class I shares upon initial offer. Prior to 4/28/06, performance
for Class R3 shares includes the historical performance of Class A shares
adjusted to reflect the
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
25.99% 20.52% 7.11%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID CAP GROWTH FUND
CLASS I RUSSELL MIDCAP GROWTH INDEX
---------------------------- ---------------------------
1/2/01 10000 10000
7506 6945
6289 5722
8288 7970
9178 8669
11552 10048
12694 11506
10/31/07 15993 13774
</Table>
CLASS R3 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
25.13% 19.73% 6.42%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID CAP GROWTH FUND
CLASS R3 RUSSELL MIDCAP GROWTH INDEX
---------------------------- ---------------------------
1/2/01 10000 10000
7468 6945
6220 5722
8149 7970
8969 8669
11209 10048
12230 11506
10/31/07 15303 13774
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
Russell Midcap(R) Growth Index(1) 19.72% 19.21% 4.80%
Average Lipper mid-cap growth
fund(2) 26.07 17.33 4.23
</Table>
applicable sales charge (or CDSC), fees, estimated expenses and fee
waivers/expense limitations of Class R3 shares upon initial offer. Unadjusted,
the performance shown for these newer classes of shares might have been lower.
1. The Russell Midcap(R) Growth Index is an unmanaged index that measures the
performance of those Russell Midcap(R) companies with higher price-to-book
ratios and higher forecasted growth values. The Russell Midcap(R) Index is an
unmanaged index that measures the performance of the 800 smallest companies
in the Russell 1000(R) Index, which, in turn, is an unmanaged index that
measures the performance of the 1,000 largest U.S. companies based on total
market capitalization. Results assume reinvestment of all income and capital
gains. The Russell Midcap(R) Growth Index is considered to be the Fund's
broad-based securities-market index for comparison purposes. An investment
cannot be made directly in an index.
2. Lipper Inc. is an independent monitor of fund performance. Results are based
on total returns with all dividend and capital-gain distributions reinvested.
THE DISCLOSURE ON THE PRECEDING PAGE IS AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Mid Cap Growth Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY MID CAP GROWTH FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2007, to October 31, 2007,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1,
2007, to October 31, 2007.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six-months ended October 31, 2007. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/07 10/31/07 PERIOD(1) 10/31/07 PERIOD(1)
CLASS A SHARES $1,000.00 $1,099.50 $ 7.94 $1,017.50 $ 7.63
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,095.55 $11.88 $1,013.75 $11.42
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,095.65 $11.88 $1,013.75 $11.42
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,101.85 $ 5.35 $1,019.95 $ 5.14
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R3 SHARES $1,000.00 $1,098.80 $ 8.68 $1,016.80 $ 8.34
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's net annualized expense ratio of each class
(1.50% for Class A, 2.25% for Class B and Class C, 1.01% for Class I and
1.64% for Class R3) multiplied by the average account value over the period,
divided by 365 and multiplied by 184 (to reflect the one-half year period).
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2007
(COMPOSITION PIE CHART)
<Table>
<Caption>
SHORT-TERM INVESTMENTS
(COLLATERAL FROM SECURITIES LIABILITIES IN EXCESS OF
COMMON STOCKS LENDING IS 22.4%)* INVESTMENT COMPANY CASH AND OTHER ASSETS
- ------------- --------------------------- ------------------ ------------------------
92.3 29.6 2 (23.9)
</Table>
* Includes 22.4% of Short-Term Investment Company Securities.
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2007 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. National Oilwell Varco, Inc.
2. Fluor Corp.
3. Hologic, Inc.
4. FactSet Research Systems, Inc.
5. Tesoro Corp.
6. Precision Castparts Corp.
7. Affiliated Managers Group, Inc.
8. Allegheny Technologies, Inc.
9. Thermo Fisher Scientific, Inc.
10. Amphenol Corp. Class A
</Table>
8 MainStay Mid Cap Growth Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Edmund C. Spelman of MacKay Shields LLC
HOW DID MAINSTAY MID CAP GROWTH FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2007?
Excluding all sales charges, MainStay Mid Cap Growth Fund returned 25.53% for
Class A shares, 24.51% for Class B shares and 24.53% for Class C shares for the
12 months ended October 31, 2007. Over the same period, the Fund's Class I
shares returned 25.99% and Class R3 shares returned 25.13%. All share classes
underperformed the 26.07% return of the average Lipper(1) mid-cap growth fund
for the 12-month period. All share classes outperformed the 19.72% return of the
Russell Midcap(R) Growth Index,(2) the Fund's broad-based securities-market
index, for the 12 months ended October 31, 2007. See page 5 for Fund returns
with sales charges.
WHICH FACTORS HAD THE GREATEST IMPACT ON THE FUND'S PERFORMANCE DURING THE
REPORTING PERIOD?
The Fund's performance relative to the Russell Midcap(R) Growth Index resulted
primarily from stock selection in industrials, energy and consumer
discretionary. The weakest-performing sectors on an absolute basis were
financials, telecommunication services and consumer staples.
DURING THE REPORTING PERIOD, WHICH STOCKS WERE STRONG PERFORMERS AND WHICH WERE
WEAK?
The strongest contributors to the Fund's performance were energy equipment &
services firm National Oilwell Varco and independent petroleum refiner and
marketer Tesoro, both of which benefited from strong demand during a period of
rising oil prices. Construction company Fluor also performed well because of
ongoing demand for its engineering and contracting services.
Major detractors from the Fund's performance included wireless telecommunication
services company NII Holdings, electrical distributor WESCO International and
biopharmaceutical company MannKind. NII Holdings experienced weak subscription
growth. WESCO International saw a slowdown in demand among some of its key
end-markets. MannKind's lead product was delayed in clinical trials.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
The Fund initiated a new position in metals manufacturer, Precision Castparts,
and the stock performed well from the time it was purchased in late 2006 through
the end of October 2007. The company benefited from strong demand for its
products from the aerospace industry. The Fund also purchased shares of data
service center EQUINIX because its services remained in high demand as the
company expanded through the United States and internationally. The Fund sold
its positions in WESCO International and MannKind. The Fund also eliminated its
position in Capital One Financial on concerns about deterioration in the credit
markets.
HOW DID THE FUND'S SECTOR WEIGHTINGS CHANGE DURING THE REPORTING PERIOD?
During the reporting period, the Fund's allocation to financials decreased to an
underweight position in relation to the Russell Midcap(R) Growth Index. The
Fund's industrial holdings moved to a substantially overweight position. The
Fund's overweight position in energy relative to the Index declined primarily
because the sector's weighting in the Index increased.
At the end of October 2007, the Fund was overweight relative to the Russell
Midcap(R) Growth Index in energy and industrials, which helped performance. At
the same time, the Fund was underweight in consumer staples and financials,
which also benefited the Fund's results.
Mid-capitalization companies are generally less established and their stocks may
be more volatile and less liquid than the securities of larger companies. The
principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a certain rate that is generally higher than the rate
expected for nongrowth companies. If these expectations are not met, the market
price for the stock may decline significantly, even if earnings showed an
absolute increase. The Fund may experience a portfolio turnover rate of more
than 100% and may generate taxable short-term capital gains.
1. See footnote on page 6 for more information on Lipper Inc.
2. See footnote on page 6 for more information on the Russell Midcap(R) Growth
Index.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecast made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (92.3%)+
- ------------------------------------------------------------------------------
AEROSPACE & DEFENSE (6.1%)
Alliant Techsystems, Inc. (a)(b) 51,950 $ 5,734,761
L-3 Communications Holdings, Inc. (b) 45,600 4,999,584
V Precision Castparts Corp. 45,500 6,816,355
------------
17,550,700
------------
BIOTECHNOLOGY (1.3%)
Cephalon, Inc. (a)(b) 50,400 3,716,496
------------
BUILDING PRODUCTS (1.0%)
Lennox International, Inc. 81,500 2,909,550
------------
CAPITAL MARKETS (2.4%)
V Affiliated Managers Group, Inc. (a)(b) 51,100 6,722,204
------------
COMMUNICATIONS EQUIPMENT (1.3%)
Harris Corp. 60,500 3,663,880
------------
CONSTRUCTION & ENGINEERING (3.5%)
V Fluor Corp. 49,100 7,757,800
Quanta Services, Inc. (a)(b) 64,700 2,135,100
------------
9,892,900
------------
CONTAINERS & PACKAGING (0.9%)
Crown Holdings, Inc. (a) 98,500 2,442,800
------------
DISTRIBUTORS (1.0%)
LKQ Corp. (a)(b) 76,100 2,934,416
------------
DIVERSIFIED FINANCIAL SERVICES (1.4%)
IntercontinentalExchange, Inc. (a)(b) 23,000 4,098,600
------------
ELECTRICAL EQUIPMENT (3.1%)
General Cable Corp. (a)(b) 49,200 3,541,908
Roper Industries, Inc. (b) 73,500 5,204,535
------------
8,746,443
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (4.5%)
V Amphenol Corp. Class A 140,100 6,202,227
Anixter International, Inc. (a)(b) 38,800 2,787,780
Avnet, Inc. (a) 95,000 3,963,400
------------
12,953,407
------------
ENERGY EQUIPMENT & SERVICES (7.0%)
Atwood Oceanics, Inc. (a) 73,600 6,200,064
ENSCO International, Inc. 71,500 3,967,535
V National Oilwell Varco, Inc. (a) 116,200 8,510,488
Weatherford International, Ltd. (a) 22,200 1,441,002
------------
20,119,089
------------
</Table>
<Table>
<Caption>
SHARES VALUE
HEALTH CARE EQUIPMENT & SUPPLIES (5.8%)
Becton, Dickinson & Co. 49,100 $ 4,097,886
V Hologic, Inc. (a)(b) 107,152 7,278,835
Inverness Medical Innovations, Inc. (a) 26,400 1,586,376
Respironics, Inc. (a) 74,600 3,734,476
------------
16,697,573
------------
HEALTH CARE PROVIDERS & SERVICES (5.6%)
Coventry Health Care, Inc. (a) 66,050 3,983,476
DaVita, Inc. (a) 34,700 2,262,093
Health Net, Inc. (a) 34,600 1,854,906
Henry Schein, Inc. (a)(b) 79,400 4,756,060
Sierra Health Services, Inc. (a) 77,500 3,278,250
------------
16,134,785
------------
HOTELS, RESTAURANTS & LEISURE (3.6%)
Boyd Gaming Corp. 24,200 1,012,044
International Game Technology 92,500 4,033,925
Las Vegas Sands Corp. (a) 38,800 5,149,148
------------
10,195,117
------------
HOUSEHOLD DURABLES (1.8%)
Garmin, Ltd. (b) 33,100 3,554,940
Harman International Industries, Inc. 20,400 1,717,680
------------
5,272,620
------------
INTERNET SOFTWARE & SERVICES (3.3%)
Akamai Technologies, Inc. (a)(b) 60,300 2,363,157
Equinix, Inc. (a)(b) 35,100 4,094,766
j2 Global Communications, Inc. (a) 90,400 3,045,576
------------
9,503,499
------------
LIFE SCIENCES TOOLS & SERVICES (5.0%)
Millipore Corp. (a)(b) 49,300 3,828,145
Pharmaceutical Product Development, Inc. 96,500 4,076,160
V Thermo Fisher Scientific, Inc. (a) 106,700 6,275,027
------------
14,179,332
------------
MACHINERY (5.1%)
Joy Global, Inc. 81,900 4,755,114
Oshkosh Truck Corp. 77,000 4,173,400
Terex Corp. (a) 77,400 5,744,628
------------
14,673,142
------------
MEDIA (1.2%)
Cablevision Systems Corp. Class A (a) 117,500 3,446,275
------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
10 MainStay Mid Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
METALS & MINING (4.4%)
V Allegheny Technologies, Inc. (b) 62,300 $ 6,365,191
Commercial Metals Co. 138,400 4,342,992
Steel Dynamics, Inc. 36,700 1,953,174
------------
12,661,357
------------
OIL, GAS & CONSUMABLE FUELS (5.6%)
Holly Corp. 35,300 2,216,840
Newfield Exploration Co. (a) 86,100 4,635,624
Peabody Energy Corp. 40,500 2,257,875
V Tesoro Corp. 113,900 6,894,367
------------
16,004,706
------------
PERSONAL PRODUCTS (1.0%)
Chattem, Inc. (a)(b) 38,200 2,838,260
------------
REAL ESTATE INVESTMENT TRUSTS (0.5%)
FelCor Lodging Trust, Inc. 71,100 1,488,834
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (3.5%)
MEMC Electronic Materials, Inc. (a) 71,100 5,205,942
Skyworks Solutions, Inc. (a) 201,400 1,856,908
Varian Semiconductor Equipment Associates, Inc.
(a) 62,600 2,880,852
------------
9,943,702
------------
SOFTWARE (4.3%)
Autodesk, Inc. (a) 87,300 4,268,970
V FactSet Research Systems, Inc. 97,800 6,896,856
TIBCO Software, Inc. (a) 124,300 1,141,074
------------
12,306,900
------------
SPECIALTY RETAIL (3.0%)
American Eagle Outfitters, Inc. 138,950 3,304,231
Dick's Sporting Goods, Inc. (a) 84,400 2,816,428
Guess?, Inc. (b) 49,600 2,548,944
------------
8,669,603
------------
TEXTILES, APPAREL & LUXURY GOODS (2.6%)
Coach, Inc. (a) 107,500 3,930,200
Phillips-Van Heusen Corp. 73,400 3,508,520
------------
7,438,720
------------
TRADING COMPANIES & DISTRIBUTORS (0.2%)
WESCO International, Inc. (a) 12,700 592,455
------------
</Table>
<Table>
<Caption>
SHARES VALUE
WIRELESS TELECOMMUNICATION SERVICES (2.3%)
Leap Wireless International, Inc. (a) 22,800 $ 1,625,868
NII Holdings, Inc. (a) 26,800 1,554,400
SBA Communications Corp. Class A (a) 96,900 3,449,640
------------
6,629,908
------------
Total Common Stocks
(Cost $189,178,289) 264,427,273
------------
INVESTMENT COMPANY (2.0%)
- ------------------------------------------------------------------------------
iShares Russell Midcap Growth Index Fund (b)(c) 48,000 5,715,360
------------
Total Investment Company
(Cost $5,293,597) 5,715,360
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (29.6%)
- ------------------------------------------------------------------------------
COMMERCIAL PAPER (7.2%)
American Express Credit Corp.
4.75%, due 11/1/07 $3,000,000 3,000,000
BNP Paribas Finance, Inc.
4.67%, due 11/5/07 2,000,000 1,998,962
Deutsche Bank Financial LLC
4.77%, due 11/1/07 3,470,000 3,470,000
National Australia Funding Delaware, Inc.
4.52%, due 11/9/07 (d) 2,000,000 1,997,991
Societe Generale North America, Inc.
4.685%, due 11/6/07 3,000,000 2,998,048
Toyota Motor Credit Corp.
4.73%, due 11/5/07 4,000,000 3,997,898
Wells Fargo & Co.
4.74%, due 11/5/07 3,000,000 2,998,420
------------
Total Commercial Paper
(Cost $20,461,319) 20,461,319
------------
<Caption>
SHARES
INVESTMENT COMPANY (22.4%)
State Street Navigator Securities
Lending Prime Portfolio (e) 64,213,455 64,213,455
------------
Total Investment Company
(Cost $64,213,455) 64,213,455
------------
Total Short-Term Investments
(Cost $84,674,774) 84,674,774
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
VALUE
Total Investments
(Cost $279,146,660) 123.9% $354,817,407(f)
Liabilities in Excess of
Cash and Other Assets (23.9) (68,493,870)
----------- ------------
Net Assets 100.0% $286,323,537
=========== ============
</Table>
<Table>
(a) Non-income producing security.
(b) Represents a security, or a portion thereof, which
is out on loan. The aggregate market value of such
securities is $62,271,607; cash collateral of
$64,213,455 (included in liabilities) was received
with which the Fund purchased highly liquid
short-term investments.
(c) Exchange Traded Fund--represents a basket of
securities that are traded on an exchange.
(d) May be sold to institutional investors only under
Rule 144a or securities offered pursuant to Section
4(2) of the Securities Act of 1933, as amended.
(e) Represents a security, or a portion thereof,
purchased with cash collateral received for
securities on loan.
(f) At October 31, 2007, cost is $279,230,037 for
federal income tax purposes and net unrealized
appreciation is as follows:
Gross unrealized appreciation $77,181,533
Gross unrealized depreciation (1,594,163)
-----------
Net unrealized appreciation $75,587,370
===========
</Table>
12 MainStay Mid Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2007
<Table>
ASSETS:
Investment in securities, at value
(identified cost $279,146,660) including
$62,271,607 market value of securities
loaned $354,817,407
Cash 15,234
Receivables:
Investment securities sold 2,466,782
Fund shares sold 777,445
Dividends and interest 13,180
Other assets 15,178
-------------
Total assets 358,105,226
-------------
LIABILITIES:
Securities lending collateral 64,213,455
Payables:
Investment securities purchased 6,590,261
Fund shares redeemed 433,971
Manager (See Note 3) 209,385
NYLIFE Distributors (See Note 3) 128,931
Transfer agent (See Note 3) 118,442
Shareholder communication 60,657
Professional fees 16,405
Custodian 3,959
Trustees 2,714
Accrued expenses 3,509
-------------
Total liabilities 71,781,689
-------------
Net assets $286,323,537
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding
(par value of $.01 per share) unlimited
number of shares authorized $ 194,190
Additional paid-in capital 196,088,346
-------------
196,282,536
Accumulated undistributed net realized gain on
investments 14,370,254
Net unrealized appreciation on investments 75,670,747
-------------
Net assets $286,323,537
=============
CLASS A
Net assets applicable to outstanding shares $146,358,883
=============
Shares of beneficial interest outstanding 9,740,715
=============
Net asset value per share outstanding $ 15.03
Maximum sales charge (5.50% of offering price) 0.87
-------------
Maximum offering price per share outstanding $ 15.90
=============
CLASS B
Net assets applicable to outstanding shares $ 62,665,480
=============
Shares of beneficial interest outstanding 4,395,961
=============
Net asset value and offering price per share
outstanding $ 14.26
=============
CLASS C
Net assets applicable to outstanding shares $ 44,769,340
=============
Shares of beneficial interest outstanding 3,141,520
=============
Net asset value and offering price per share
outstanding $ 14.25
=============
CLASS I
Net assets applicable to outstanding shares $ 31,993,405
=============
Shares of beneficial interest outstanding 2,105,015
=============
Net asset value and offering price per share
outstanding $ 15.20
=============
CLASS R3
Net assets applicable to outstanding shares $ 536,429
=============
Shares of beneficial interest outstanding 35,796
=============
Net asset value and offering price per share
outstanding $ 14.99
=============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 13
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2007
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 1,447,085
Interest 532,472
Income from securities loaned--net 115,571
------------
Total income 2,095,128
------------
EXPENSES:
Manager (See Note 3) 1,790,873
Distribution--Class B (See Note 3) 444,190
Distribution--Class C (See Note 3) 319,871
Distribution--Class R3 (See Note 3) 1,356
Transfer agent--Classes A, B and C (See Note
3) 682,255
Transfer agent--Class I and R3 (See Note 3) 7,778
Distribution/Service--Class A (See Note 3) 323,742
Service--Class B (See Note 3) 148,063
Service--Class C (See Note 3) 106,624
Distribution/Service--Class R3 (See Note 3) 1,356
Shareholder communication 107,144
Registration 72,367
Professional fees 70,356
Recordkeeping 50,545
Custodian 14,578
Trustees 12,968
Shareholder service--Class R3 (See Note 3) 542
Miscellaneous 16,379
------------
Total expenses before recoupment 4,170,987
Net recouped fees (See Note 3) 141,868
------------
Net expenses 4,312,855
------------
Net investment loss (2,217,727)
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 14,589,240
Net change in unrealized appreciation on
investments 41,122,424
------------
Net realized and unrealized gain on investments 55,711,664
------------
Net increase in net assets resulting from
operations $53,493,937
============
</Table>
14 MainStay Mid Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2007 AND OCTOBER 31, 2006
<Table>
<Caption>
2007 2006
INCREASE IN NET ASSETS:
Operations:
Net investment loss $ (2,217,727) $ (2,108,907)
Net realized gain on investments 14,589,240 11,990,917
Net change in unrealized
appreciation on investments 41,122,424 1,465,538
---------------------------
Net increase in net assets
resulting from operations 53,493,937 11,347,548
---------------------------
Distributions to shareholders:
From net realized gain on investments:
Class A (5,019,232) --
Class B (2,433,580) --
Class C (1,837,897) --
Class I (70,385) --
Class R3 (31,948) --
---------------------------
Total distributions to
shareholders (9,393,042) --
---------------------------
Capital share transactions:
Net proceeds from sale of shares 96,169,452 157,996,959
Net asset value of shares issued
to shareholders in reinvestment
of distributions 7,419,512 --
Cost of shares redeemed (88,589,528) (71,897,072)
Net asset value of shares converted
(See Note 1):
Class A 3,433,694 16,051,062
Class B (3,433,694) (16,051,062)
---------------------------
Increase in net assets derived
from capital share transactions 14,999,436 86,099,887
---------------------------
Net increase in net assets 59,100,331 97,447,435
NET ASSETS:
Beginning of year 227,223,206 129,775,771
---------------------------
End of year $286,323,537 $227,223,206
===========================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 15
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------------------
JANUARY 1,
2003* YEAR
THROUGH ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning
of period $ 12.47 $ 11.40 $ 9.09 $ 8.23 $ 5.86 $ 8.25
-------- -------- ------- ------- ----------- ------------
Net investment loss (a) (0.09) (0.09) (0.10) (0.09) (0.07) (0.09)
Net realized and unrealized
gain (loss) on investments 3.17 1.16 2.41 0.95 2.44 (2.30)
-------- -------- ------- ------- ----------- ------------
Total from investment
operations 3.08 1.07 2.31 0.86 2.37 (2.39)
-------- -------- ------- ------- ----------- ------------
Less distributions:
From net realized gain on
investments (0.52) -- -- -- -- --
-------- -------- ------- ------- ----------- ------------
Net asset value at end of
period $ 15.03 $ 12.47 $ 11.40 $ 9.09 $ 8.23 $ 5.86
======== ======== ======= ======= =========== ============
Total investment return (b) 25.53% 9.39% 25.41% 10.45% 40.44%(c) (28.97%)
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (0.63%) (0.69%) (0.91%) (0.99%) (1.21%)+ (1.22%)
Net expenses 1.50% 1.50% 1.50% 1.50% 1.50%+ 1.50%
Expenses (before
recoupment/waiver/reimbursement) 1.44% 1.55% 1.63% 1.69% 1.95%+ 1.81%
Portfolio turnover rate 48% 52% 44% 52% 42% 188%
Net assets at end of period
(in 000's) $146,359 $124,741 $48,597 $46,234 $35,473 $18,523
</Table>
<Table>
<Caption>
CLASS C
--------------------------------------------------------------------------------
JANUARY 1,
2003* YEAR
THROUGH ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning
of period $ 11.94 $ 10.99 $ 8.82 $ 8.05 $ 5.77 $ 8.18
------- ------- ------- ------ ----------- ------------
Net investment loss (a) (0.18) (0.17) (0.17) (0.15) (0.11) (0.13)
Net realized and unrealized
gain (loss) on investments 3.01 1.12 2.34 0.92 2.39 (2.28)
------- ------- ------- ------ ----------- ------------
Total from investment
operations 2.83 0.95 2.17 0.77 2.28 (2.41)
------- ------- ------- ------ ----------- ------------
Less distributions:
From net realized gain on
investments (0.52) -- -- -- -- --
------- ------- ------- ------ ----------- ------------
Net asset value at end of
period $ 14.25 $ 11.94 $ 10.99 $ 8.82 $ 8.05 $ 5.77
======= ======= ======= ====== =========== ============
Total investment return (b) 24.53% 8.64% 24.60% 9.57% 39.51%(c) (29.46%)
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (1.36%) (1.44%) (1.66%) (1.74%) (1.96%)+ (1.97%)
Net expenses 2.25% 2.25% 2.25% 2.25% 2.25%+ 2.25%
Expenses (before
recoupment/waiver/reimbursement) 2.19% 2.30% 2.38% 2.44% 2.70%+ 2.56%
Portfolio turnover rate 48% 52% 44% 52% 42% 188%
Net assets at end of period
(in 000's) $44,769 $42,625 $14,181 $3,580 $2,148 $ 871
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges. Classes I and R3 are not subject to
sales charges.
(c) Total return is not annualized.
(d) The amount shown for a share outstanding does not correspond with aggregate net realized
and unrealized gain (loss) on investments due to the timing of purchases and redemptions
of Fund shares in relation to fluctuating market values of the investments of the Fund
during the period.
(e) Total return is calculated assuming a purchase of a share of the first day and a sale on
the last day of each period reported and includes reinvestment of dividends and
distributions. Total return includes the effect of expense subsidies. Total returns may
reflect adjustments to conform to generally accepted accounting principles.
</Table>
16 MainStay Mid Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
- -------------------------------------------------------------------------------------
JANUARY 1,
2003* YEAR
THROUGH ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
$ 11.95 $ 10.98 $ 8.82 $ 8.05 $ 5.77 $ 8.18
------- ------- ------- ------- ----------- ------------
(0.18) (0.17) (0.17) (0.15) (0.11) (0.13)
3.01 1.14 2.33 0.92 2.39 (2.28)
------- ------- ------- ------- ----------- ------------
2.83 0.97 2.16 0.77 2.28 (2.41)
------- ------- ------- ------- ----------- ------------
(0.52) -- -- -- -- --
------- ------- ------- ------- ----------- ------------
$ 14.26 $ 11.95 $ 10.98 $ 8.82 $ 8.05 $ 5.77
======= ======= ======= ======= =========== ============
24.51% 8.83% 24.49% 9.57% 39.51%(c) (29.46%)
(1.37%) (1.44%) (1.66%) (1.74%) (1.96%)+ (1.97%)
2.25% 2.25% 2.25% 2.25% 2.25%+ 2.25%
2.19% 2.30% 2.38% 2.44% 2.70%+ 2.56%
48% 52% 44% 52% 42% 188%
$62,665 $57,469 $62,792 $35,710 $21,189 $7,899
</Table>
<Table>
<Caption>
CLASS I CLASS R3
- ---------------------------------------- ----------------------------
MARCH 29, APRIL 28,
2005** 2006**
YEAR ENDED THROUGH YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2007 2006 2005 2007 2006
$ 12.56 $11.43 $10.45 $12.46 $13.24
------- ------ ----------- ----------- -----------
(0.03) (0.04) (0.03) (0.10) (0.08)
3.19 1.17 1.01 3.15 (0.70)(d)
------- ------ ----------- ----------- -----------
3.16 1.13 0.98 3.05 (0.78)
------- ------ ----------- ----------- -----------
(0.52) -- -- (0.52) --
------- ------ ----------- ----------- -----------
$ 15.20 $12.56 $11.43 $14.99 $12.46
======= ====== =========== =========== ===========
25.99% 9.89% 9.38%(c) 25.13%(e) (5.89%)(c)
(0.19%) (0.28%) (0.51%)+ (0.76%) (1.27%)(d)+
1.01% 1.07% 1.10%+ 1.64% 1.62%+
1.00% 1.04% 1.23%+ 1.60% 1.75%+
48% 52% 44% 48% 52%
$31,993 $1,626 $4,205 $ 536 $ 762
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 17
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises nineteen funds (collectively referred to as the
"Funds"). These financial statements and notes relate only to MainStay Mid Cap
Growth Fund (the "Fund"), a diversified fund.
The Fund currently offers five classes of shares. Class A shares, Class B shares
and Class C shares commenced on January 2, 2001. Class I shares commenced on
March 29, 2005. Class R3 shares commenced on April 28, 2006. Class A shares are
offered at net asset value per share plus an initial sales charge. No sales
charge applies on investments of $1 million or more (and certain other qualified
purchases) in Class A shares, but a contingent deferred sales charge is imposed
on certain redemptions of such shares within one year of the date of purchase.
Class B shares and Class C shares are offered without an initial sales charge,
although a declining contingent deferred sales charge may be imposed on
redemptions made within up to six years of purchase of Class B shares and a 1%
contingent deferred sales charge may be imposed on redemptions made within one
year of purchase of Class C shares. Class I and Class R3 shares are not subject
to a sales charge. As approved by the Board of Trustees in 1997, Class B shares
convert to Class A shares eight years after the date they were purchased. The
five classes of shares bear the same voting (except for issues that relate
solely to one class), dividend, liquidation and other rights and conditions
except that Class B and Class C shares are subject to higher distribution fee
rates than Class A and Class R3 shares under a distribution plan pursuant to
Rule 12b-1 under the 1940 Act. Class I shares are not subject to a distribution
or service fee. Class R3 shares are authorized to pay to New York Life
Investment Management LLC, its affiliates, or third-party service providers, as
compensation for services rendered to shareholders of Class R3 shares, a
shareholder service fee.
The Fund's investment objective is to seek long-term growth of capital.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). Securities that are not traded on the valuation date are
valued at the mean of the latest quoted bid and asked prices. Prices normally
are taken from the principal market in which each security trades. Investments
in mutual funds are valued at their net asset value as of the close of the New
York Stock Exchange on the date of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Directors to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: a security the trading for which has been
halted or suspended; a debt security that has recently gone into default and for
which there is not a current market quotation; a security of an issuer that has
entered into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; a security where the trading on that security's principal market
is temporarily closed at a time when, under normal conditions, it would be open.
At October 31, 2007, the Fund did not hold securities that were valued in such a
manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
of net investment income and distributions of net realized capital and currency
gains, if any, annually. All dividends and distributions are reinvested in
shares of the Fund, at net asset value, unless the shareholder elects otherwise.
Dividends and distributions to shareholders are determined in accordance with
federal income tax regulations and may differ from generally accepted accounting
principles in the United States of America. Permanent book/tax differences
relating to income and gains are reclassified amongst undistributed net
investment income, accumulated net realized gain or loss and paid-in-capital.
18 MainStay Mid Cap Growth Fund
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B) on
page 20) are allocated to separate classes of shares pro rata based upon their
relative net assets value on the date the expenses are incurred. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) SECURITIES LENDING. In order to realize additional income the Fund may lend
its securities to broker-dealers and financial institutions. The loans are
collateralized by cash or securities at least equal at all times to the market
value of the securities loaned. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. The Fund may bear
the risk of delay in recovery of, or loss of rights in, the securities loaned
should the borrower of the securities experience financial difficulty. The Fund
receives compensation for lending its securities in the form of fees or it
retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(H) INDEMNIFICATIONS. In the normal course of business, the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote.
However, there can be no assurance that material liabilities related to such
obligations will not arise in the future which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager") a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. NYLIM provides offices and conducts clerical, recordkeeping and
bookkeeping services, and is responsible for the financial and accounting
records required to be maintained by the Fund. NYLIM also pays the salaries and
expenses of all personnel affiliated with the Fund and all the operational
expenses that are not the responsibility of the Fund. MacKay Shields LLC (the
"Subadvisor"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life, serves as subadvisor to the Fund and is responsible
for the day-to-day portfolio management of the Fund. Pursuant to the terms of a
Subadvisory Agreement between NYLIM and the Subadvisor, NYLIM pays for the
services of the Subadvisor.
The Fund is contractually obligated to pay NYLIM a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.75% on assets up to $500 million and 0.70% on assets in
excess of $500 million.
Effective March 1, 2007, NYLIM has entered into a written expense limitation
agreement under which it has agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses (total annual operating expenses
excluding taxes, interest, litigation, extraordinary expenses, and brokerage and
other transaction expenses relating to the purchase or sale of portfolio
investments) do not exceed the following amounts of average daily net assets for
each class: Class A, 1.50%; Class B, 2.25%; Class C, 2.25%; Class I, 1.12% and
Class R3, 1.72%. This expense limitation may be modified or terminated only with
the approval of the Board of Trustees. NYLIM may recoup the amount of any
management fee waivers or expense reimbursements from the Fund pursuant to the
agreement if such action does not cause the Fund to exceed existing expense
limitations and the recoupment is made within three years after the year in
which NYLIM incurred the expense.
www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the year ended October 31, 2007, NYLIM earned fees from the Fund in the
amount of $1,790,873 and recouped its fees in the amount of $141,868.
As of October 31, 2007, the amounts of waived fees that are subject to possible
recoupment by NYLIM, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2009* TOTAL
$18,665 $18,665
---------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Prior to March 1, 2007, NYLIM had an agreement in place under which it had
agreed to waive a portion of the Fund's management fee or reimburse the expenses
of the Fund so that the Fund's total ordinary operating expenses did not exceed
1.50% of the Fund's average daily net assets for its Class A shares. NYLIM also
applied an equivalent waiver or reimbursement, in an equal amount of basis
points, to the other share classes of the Fund.
State Street Bank & Trust Company ("SSBT"), One Lincoln Street, Boston,
Massachusetts, 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with NYLIM. These services include calculating
daily net asset values of the Fund, maintaining general ledger and sub-ledger
accounts for the calculation of the Fund's respective net asset values, and
assisting NYLIM in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, SSBT is compensated by
NYLIM.
(B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has a Distribution Agreement with NYLIFE Distributors LLC (the
"Distributor"), an indirect wholly-owned subsidiary of New York Life. The Fund,
with respect to Class A, Class B, Class C and Class R3 shares, has adopted
distribution plans (the "Plans") in accordance with the provisions of Rule 12b-1
under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives a monthly distribution
fee from the Fund at an annual rate of 0.25% of the average daily net assets of
the Fund's Class A shares, which is an expense of the Class A shares of the Fund
for distribution or service activities as designated by the Distributor.
Pursuant to the Class B and Class C Plans, the Fund pays the Distributor a
monthly distribution fee, which is an expense of the Class B and Class C shares
of the Fund, at the annual rate of 0.75% of the average daily net assets of the
Fund's Class B and Class C shares. The Plans provide that the Class B and Class
C shares of the Fund also incur a service fee at the annual rate of 0.25% of the
average daily net asset value of the Class B and Class C shares of the Fund.
Pursuant to the Class R3 Plan, the Distributor receives a monthly distribution
fee from the Fund at the annual rate of 0.50% of the average daily net assets of
the Fund's Class R3 shares, which is an expense of the Class R3 shares of the
Fund for distribution or service activities as designated by the Distributor.
Class I shares are not subject to a distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
In accordance with the Shareholder Services Plan for the Class R3 shares, the
Manager has agreed to provide, through its affiliates or independent third
parties, various shareholder and administrative support services to shareholders
of the Class R3 shares. For its services, the Manager is entitled to a
Shareholder Service Fee accrued daily and paid monthly at an annual rate of
0.10% of the average daily net assets attributable to the Class R3 shares.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $57,933 for the year ended
October 31, 2007. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $10,525, $89,785 and $12,304, respectively, for the year ended October
31, 2007.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund, for the year ended October 31, 2007,
amounted to $690,033.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts, effective March 1, 2007. Shareholders with an account
balance of less than $1,000 are charged an annual per account fee of $20
(assessed semi-annually).
(F) CAPITAL. At October 31, 2007, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $ 307 0.0*%
- --------------------------------------------------------
Class C 149 0.0*
- --------------------------------------------------------
Class I 3,029 0.0*
- --------------------------------------------------------
Class R3 11,776 2.2
- --------------------------------------------------------
</Table>
* Less than one-tenth of a percent.
20 MainStay Mid Cap Growth Fund
(G) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2007, these fees, which are included in professional fees
shown on the Statement of Operations, were $8,873.
The Fund pays the Manager a monthly fee for certain pricing and recordkeeping
services provided under the Accounting Agreement at the annual rate of 1/20 of
1% for the first $20 million of average monthly net assets, 1/30 of 1% of the
next $80 million of average monthly net assets and 1/100 of 1% of any amount in
excess of $100 million of average monthly net assets. Fees for these services
provided to the Fund by the Manager amounted to $50,545 for the year ended
October 31, 2007.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2007, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL TEMPORARY APPRECIATION ACCUMULATED
INCOME GAINS (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$-- $14,453,631 $-- $75,587,370 $90,041,001
--------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized appreciation is
primarily due to wash sale deferrals.
The following table discloses the current year reclassifications between
accumulated net investment income and additional paid-in-capital, arising from
permanent differences; net assets at October 31, 2007 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET NET REALIZED
INVESTMENT INCOME GAIN (LOSS) ON ADDITIONAL PAID-IN
(LOSS) INVESTMENTS CAPITAL
$2,217,727 $-- $ (2,217,727)
-------------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to net operating losses.
The tax character of distributions paid during the years ended October 31, 2007
and October 31, 2006, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2007 2006
Distributions paid from:
Long-Term Capital Gains $9,393,042 --
- -----------------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
SSBT is the custodian of cash and securities of the Fund. Custodial fees are
charged to the Fund based on the market value of securities in the Fund and the
number of certain cash transactions incurred by the Fund.
NOTE 6--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. These funds pay a commitment fee, at an annual rate of .060% of the
average commitment amount, regardless of usage, to The Bank of New York, which
acts as agent to the syndicate. Such commitment fees are allocated among the
funds based upon net assets and other factors. Interest on any revolving credit
loan is charged based upon the Federal Funds Advances rate. There were no
borrowings made or outstanding on the line of credit during the year ended
October 31, 2007.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2007, purchases and sales of securities, other
than short-term securities, were $110,959 and $109,296, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS
(IN 000'S):
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 3,254 $44,981
Shares issued to shareholders in
reinvestment of distributions: 325 4,067
Shares redeemed (4,089) (54,816)
------------------
Net decrease in shares outstanding
before conversion (510) (5,768)
Shares converted from Class B (See Note
1) 251 3,434
------------------
Net decrease (259) $(2,334)
==================
Year ended October 31, 2006:
Shares sold 7,429 $92,765
Shares redeemed (3,021) (37,039)
------------------
Net increase in shares outstanding
before conversion 4,408 55,726
Shares converted from Class B (See Note
1) 1,328 16,051
------------------
Net increase 5,736 $71,777
==================
</Table>
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 776 $10,219
Shares issued to shareholders in
reinvestment of distributions: 191 2,271
Shares redeemed (1,118) (14,328)
------------------
Net decrease in shares outstanding
before conversion (151) (1,838)
Shares reacquired upon conversion into
Class A (See Note 1) (264) (3,434)
------------------
Net decrease (415) $(5,272)
==================
Year ended October 31, 2006:
Shares sold 1,749 $20,943
Shares redeemed (1,276) (15,094)
------------------
Net increase in shares outstanding
before conversion 473 5,849
Shares reacquired upon conversion into
Class A (See Note 1) (1,379) (16,051)
------------------
Net decrease (906) $(10,202)
==================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 945 $12,292
Shares issued to shareholders in
reinvestment of distributions: 82 979
Shares redeemed (1,455) (18,595)
------------------
Net decrease (428) $(5,324)
==================
Year ended October 31, 2006:
Shares sold 2,948 $35,342
Shares redeemed (669) (7,839)
------------------
Net increase 2,279 $27,503
==================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 2,001 $28,618
Shares issued to shareholders in
reinvestment of distributions: 6 70
Shares redeemed (31) (448)
------------------
Net increase 1,976 $28,240
==================
Year ended October 31, 2006:
Shares sold 651 $8,177
Shares redeemed (890) (11,899)
------------------
Net decrease (239) $(3,722)
==================
</Table>
<Table>
<Caption>
CLASS R3 SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 4 $ 59
Shares issued to shareholders in
reinvestment of distributions: 3 32
Shares redeemed (32) (402)
------------------
Net decrease (25) $ (311)
==================
Period from April 28, 2006* through
October 31, 2006:
Shares sold 63 $ 770
Shares redeemed (2) (26)
------------------
Net increase 61 $ 744
==================
</Table>
* Commencement of Operations.
22 MainStay Mid Cap Growth Fund
NOTE 9--OTHER MATTERS:
In 2004 the Securities and Exchange Commission ("SEC") raised concerns relating
to a guarantee provided to shareholders of the MainStay Equity Index Fund and
the fees and expenses of that Fund, as well as the related guaranteed disclosure
to that fund's shareholders. Discussions have been held with the SEC concerning
a possible resolution of this matter. There can be no assurance at this time as
to the outcome of these efforts.
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS:
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation becomes effective for the Fund's 2008 fiscal
year, and is to be applied to all open tax years as of the date of
effectiveness. Based on Management's analysis, the determination has been made
that the adoption of the interpretation on November 1, 2007, did not have an
impact on the Fund's financial statements upon adoption. Management continually
reviews the Fund's tax positions and such conclusions under the Interpretation
based on factors, including, but not limited to, ongoing analyses of tax laws,
regulations and interpretations, thereof.
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The changes to current generally accepted accounting
principles from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures
about fair value measurements. As of October 31, 2007, the Fund does not believe
the adoption of SFAS No. 157 will impact the amounts reported in the Fund's
financial statements. However, additional disclosures may be required about the
inputs used to develop the measurements and the effect of certain measurements
reported in the financial statements for a fiscal period.
www.mainstayfunds.com 23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Mid Cap Growth Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2007, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years or periods in the two-year period
then ended, and the financial highlights for each of the years or periods in the
four-year period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits. The financial highlights for the periods presented through
October 31, 2003, were audited by other auditors, whose report dated December
18, 2003, expressed an unqualified opinion thereon.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2007, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Mid Cap Growth Fund of The MainStay Funds as of October 31, 2007, the
results of its operations for the year then ended, the changes in its net assets
for each of the years or periods in the two-year period then ended, and the
financial highlights for each of the years or periods in the four-year period
then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 20, 2007
24 MainStay Mid Cap Growth Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with New York Life Investment Management LLC (the "Manager") and the
Subadvisory Agreement between the Manager and MacKay Shields LLC, a wholly-owned
indirect subsidiary of New York Life Investment Management Holdings LLC, an
affiliate of the Manager, (the "Subadvisor"), (each an "Agreement") at a meeting
held on May 22 and 23, 2007. In connection with the approval of each Agreement,
the Trustees reviewed a significant amount of a wide variety of information that
they had requested and received from the Manager and the Subadvisor, and data
and analysis from an outside data provider and a third party consultant. The
Trustees considered various industry trends and regulatory developments in their
deliberations. In considering approval of each Agreement, and in evaluating the
fairness of the compensation to be paid by the Fund, the Trustees met both as a
full Board and in executive session with no Interested Trustee present, in
advance of the meeting at which the Agreements were approved, and they
considered a number of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and the Subadvisor have provided historically to the Fund, and
also generally to other series of the Trust. Among other services, the Manager's
services have included investment management services, including monitoring and
evaluating the Subadvisor's investment program and investment results with
respect to the Fund, and the Subadvisor's compliance with the Fund's investment
policies and restrictions, and administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets,
and its other services include, among other services, providing reports to the
Manager and reviewing certain aspects of Fund filings. The Trustees considered,
among other things, the Manager's and Subadvisor's management, personnel,
resources, operations and portfolio management capabilities. The Board reviewed
reports on the Subadvisor's brokerage practices, including with respect to best
execution of portfolio trades. The Trustees considered the Manager's supervision
of the Fund's service providers and its attention to the compliance program of
the Trust, the Manager, the Subadvisor and certain other service providers, as
well as the Subadvisor's attention to its compliance program. The Trustees noted
the generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's favorable performance
over the medium and longer terms and its weaker recent performance.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information that indicated that the profitability to the Manager and its
affiliates from the Management Agreement with respect to the Fund was moderate
to low and from the overall relationship with the Trust was low. The Trustees
considered other benefits that the Manager and its affiliates receive from the
relationship with the Trust, including benefits that NYLIFE Distributors and
MainStay Shareholder Services receive in exchange for services they provide to
the Funds, and certain benefits from soft dollar arrangements. The Trustees
acknowledged certain benefits to the reputation of the Manager and the Trust
from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They considered that, across the Trust
(though not every series or share class), gross transfer agency fees tended to
be relatively high and, therefore, adversely affected gross expense ratios.
Noting that the Trust historically permitted smaller investor accounts, the
Trustees considered measures that had been recently implemented that were
intended to increase the average size of shareholder accounts, including
generally higher investment minimums, and small account fees, and the Trustees
considered
www.mainstayfunds.com 25
potential benefits to the Manager and its affiliates arising from such measures.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the Manager's willingness to implement
contractual breakpoints that would reduce the Fund's management fee at asset
levels above the breakpoints, and the fact that the breakpoints were intended to
provide that shareholders would share in benefits from economies of scale
obtained through the growth in the Fund's assets. The Trustees noted that the
Fund not reached the asset level at which breakpoints would reduce the Fund's
management fee rate. The Trustees reviewed information about the potential
effect of asset growth on Fund expenses, the difficulty of forecasting its
effect on the profitability of the Manager and its affiliates, and the
management fee breakpoints applicable to the Fund and certain other funds.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by the
Fund, the Trustees evaluated factors such as the fees and expenses borne by
other registered funds in the market pursuing strategies generally similar to
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts having investment strategies similar to that
of the Fund, and took account of explanations and other information relating to
the fees and expenses of those other funds and accounts. The Trustees considered
the current and proposed contractual and net management fees, its anticipated
gross and net expense ratio, and various components of the expense ratio, in
comparison to other funds in comparison groupings. The Trustees generally
acknowledged the historical relationships among the Manager, the Subadvisor and
the Trust and the likely difficulties in implementing an alternative to the
investment management arrangement between the Trust and the Manager. The
Trustees took account of the Manager's willingness to maintain the management
fee waiver and expense limitation applicable to the Fund.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings, with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. This summary set out
above describes the most important, but not all, of the factors considered by
the Trustees in considering each Agreement. On the basis of their review, a
majority of the Trustees and a majority of the Non-Interested Trustees concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the judgment of a
majority of the Trustees and a majority of the Non-Interested Trustees that
approval of each Agreement was in the best interests of the Fund and its
shareholders.
26 MainStay Mid Cap Growth Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advise shareholders within
60 days of the Fund's fiscal year end (October 31, 2007) as to the federal tax
status of dividends paid by the Fund during such fiscal year. Accordingly, the
Fund paid long-term capital gain distributions of $9,393,042.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
or (iii) on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 1-800-MAINSTAY (1-800-624-6782). You also can obtain and review copies
of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC
(information on the operation of the Public Reference Room may be obtained by
calling (1-800-SEC-0330).
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of The MainStay Funds (the
"Trust") was held on May 4, 2007, at the offices of New York Life Investment
Management LLC in Parsippany, New Jersey. The purpose of the meeting was to
elect the following individuals to the Board of Trustees of the Trust:
- Susan B. Kerley
- Alan R. Latshaw
- Peter Meenan
- Richard H. Nolan, Jr.
- Richard S. Trutanic
- Roman L. Weil
- John A. Weisser
- Brian A. Murdock (Interested Trustee)
There are no other Trustees of the Trust.
No other business came before the special meeting. The proposal to elect
Trustees was passed by the shareholders of the Fund as shown below:
<Table>
<Caption>
MID CAP VOTES VOTES
GROWTH FUND FOR WITHHELD ABSTENTIONS TOTAL
Susan B.
Kerley 8,756,994.702 33,383.985 11,944.000 8,802,322.687
- -----------------------------------------------------------------------
Alan R.
Latshaw 8,758,124.245 32,254.442 11,944.000 8,802,322.687
- -----------------------------------------------------------------------
Peter Meenan 8,756,833.763 33,544.924 11,944.000 8,802,322.687
- -----------------------------------------------------------------------
Richard H.
Nolan, Jr. 8,758,285.184 32,093.503 11,944.000 8,802,322.687
- -----------------------------------------------------------------------
Richard S.
Trutanic 8,757,394.604 32,981.083 11,944.000 8,802,322.687
- -----------------------------------------------------------------------
Roman L. Weil 8,756,942.794 33,435.893 11,944.000 8,802,322.687
- -----------------------------------------------------------------------
John A.
Weisser 8,757,824.647 32,554.040 11,944.000 8,802,322.687
- -----------------------------------------------------------------------
Brian A.
Murdock 8,755,517.156 34,861.531 11,944.000 8,802,322.687
- -----------------------------------------------------------------------
</Table>
This resulted in approval of the proposal.
www.mainstayfunds.com 27
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Pursuant to
notice, a Special Meeting of Shareholders of the Trust was held on May 4, 2007,
at NYLIM's offices in Parsippany, New Jersey. The Trustees listed below were
elected to serve the Trust effective June 7, 2007.
Each Trustee serves until his or her successor is elected and qualified or until
his or her resignation, death or removal. The Retirement Policy provides that a
Trustee shall tender his or her resignation upon reaching age 72. A Trustee
reaching the age of 72 may continue for additional one-year periods with the
approval of the Board's Nominating and Governance Committee, except that no
Trustee shall serve on the Board past his or her 75th birthday. Officers serve a
term of one year and are elected annually by the Trustees. The business address
of each Trustee and officer listed below is 51 Madison Avenue, New York, New
York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF FUNDS
POSITION(S) HELD IN FUND COMPLEX
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
BRIAN A. MURDOCK Indefinite; Member of the Board of Managers 73 Trustee, Eclipse Funds since
3/14/56 Trustee and Chief and President (since 2004) and June, 2007 (3 funds); Director,
Executive Officer Chief Executive Officer (since Eclipse Funds Inc. since June
since 2006 2006), New York Life Investment 2007 (22 funds); Director,
Management LLC and New York MainStay VP Series Fund, Inc.,
Life Investment Management since 2006 (24 portfolios);
Holdings LLC; Senior Vice Director, ICAP Funds, Inc.,
President, New York Life since 2006 (3 funds)
Insurance Company (since 2004);
Chairman of the Board and
President, NYLIFE Distributors
LLC (since 2004); Member of the
Board of Managers, NYLCAP
Manager LLC and Madison Capital
Funding LLC (since 2004),
MacKay Shields LLC and
Institutional Capital LLC
(since 2006), and McMorgan &
Company LLC (since 2007); Chief
Executive Officer, Eclipse
Funds and Eclipse Funds Inc.
(since 2006); Chairman (2006 to
2007) and Director and Chief
Executive Officer (since 2006),
MainStay VP Series Fund, Inc.;
Director and Chief Executive
Officer, ICAP Funds, Inc.
(since 2006); Chief Investment
Officer, MLIM Europe and Asia
(2001 to 2003); President of
Merrill Japan and Chairman of
MLIM's Pacific Region (1999 to
2001)
-----------------------------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow Capital
Management, Inc., McMorgan & Company LLC, NYLIFE Securities Inc. and/or NYLIFE
Distributors LLC, as described in detail above in the column "Principal
Occupation(s) During Past Five Years."
28 MainStay Mid Cap Growth Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. KERLEY Indefinite; Partner, Strategic Management 73 Chairman since 2005 and Trustee
8/12/51 Chairman and Advisors LLC (since 1990) since 2000, Eclipse Funds (3
Trustee since funds); Chairman since 2005 and
June 2007 Director since 1990, Eclipse
Funds Inc. (22 funds); Chairman
and Director, ICAP Funds, Inc.,
since 2006 (3 funds); Chairman
and Director, MainStay VP
Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
Legg Mason Partners Funds,
Inc., since 1991 (30
portfolios)
----------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & Young 73 Trustee, Eclipse Funds since
3/27/51 Trustee and Audit LLP (2002 to 2003); Partner, June 2007 (3 funds); Director,
Committee Arthur Andersen LLP (1989 to Eclipse Funds Inc. since June
Financial Expert 2002); Consultant to the Audit 2007 (22 funds); Director, ICAP
since 2006 and Compliance Committee of The Funds, Inc., since June 2007 (3
MainStay Funds (2004 funds); Director, MainStay VP
to 2006) Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
State Farm Associates Funds
Trusts since 2005 (3
portfolios); Trustee, State
Farm Mutual Fund Trust since
2005 (15 portfolios); Trustee,
State Farm Variable Product
Trust since 2005 (9 portfolios)
----------------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds since
12/5/41 Trustee since President and Chief Executive 2002 (3 funds); Director,
June 2007 Officer, Babson-United, Inc. Eclipse Funds Inc. since 2002
(financial services firm) (2000 (22 funds); Director, ICAP
to 2004); Independent Funds, Inc.,
Consultant (1999 to 2000); Head since 2006 (3 funds); Director,
of Global Funds, Citicorp (1995 MainStay VP Series Fund, Inc.,
to 1999) since June 2007 (24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 73 Trustee, Eclipse Funds since
NOLAN, JR. Trustee since Management; President--Shields/ June 2007 (3 funds); Director,
11/16/46 June 2007 Alliance, Alliance Capital Eclipse Funds Inc. since June
Management (1994 to 2004) 2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 2006
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman (since 1990) and Chief 73 Trustee, Eclipse Funds since
TRUTANIC Trustee since Executive Officer (1990 to June 2007 (3 funds); Director,
2/13/52 1994 1999), Somerset Group Eclipse Funds Inc. since June
(financial advisory firm); 2007 (22 funds); Director, ICAP
Managing Director and Advisor, Funds, Inc., since June 2007 (3
The Carlyle Group (private funds); Director, MainStay VP
investment firm) (2002 to Series Fund, Inc., since June
2004); Senior Managing Director 2007 (24 portfolios)
and Partner, Groupe Arnault
S.A. (private investment firm)
(1999
to 2002)
----------------------------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 29
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEE
ROMAN L. WEIL Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds since
5/22/40 Trustee and Audit Accounting, Graduate School of June 2007 (3 funds); Director,
Committee Business, University of Eclipse Funds Inc. since June
Financial Expert Chicago; President, Roman L. 2007 (22 funds); Director, ICAP
since June 2007 Weil Associates, Inc. Funds, Inc., since June 2007 (3
(consulting firm) funds); Director, MainStay VP
Series Fund, Inc., since 1994
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 73 Trustee, Eclipse Funds since
10/22/41 Trustee since Salomon Brothers, Inc. (1971 to June 2007 (3 funds); Director,
June 2007 1995) Eclipse Funds Inc. since June
2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 1997
(24 portfolios); Trustee,
Direxion Funds (69 funds) and
Direxion Insurance Trust (45
funds) since March 2007
----------------------------------------------------------------------------------------------------------------------
</Table>
Terry L. Lierman resigned as Trustee of the Trust effective May 31, 2007. Edward
J. Hogan, John B. McGuckian and Donald E. Nickelson resigned as Trustees of the
Trust effective June 7, 2007.
At a meeting of the Board of Trustees held on June 7 and 8, 2007, the following
individuals were appointed to serve as Officers of the Trust effective June 7,
2007:
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ROBERT A. Chief Legal Senior Managing Director, General Counsel and Secretary, New
ANSELMI Officer since York Life Investment Management LLC (including predecessor
10/19/46 2004 advisory organizations) (since 2000); Secretary (since 2001)
and General Counsel (since 2004), New York Life Investment
Management Holdings LLC; Senior Vice President, New York
Life Insurance Company (since 2000); Vice President and
Secretary, McMorgan & Company LLC (since 2001); Secretary,
NYLIM Service Company LLC (since 2005), NYLCAP Manager LLC
(since 2004), Madison Capital Funding LLC (since 2002), and
Institutional Capital LLC (since 2006); Chief Legal Officer,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), McMorgan Funds (since 2005) and
ICAP Funds, Inc. (since 2006); Managing Director and Senior
Counsel, Lehman Brothers Inc. (1998 to 1999); General
Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998)
-------------------------------------------------------------------------------------------------
JACK R. Treasurer and Managing Director, New York Life Investment Management LLC
BENINTENDE Principal (since June 2007); Treasurer and Principal Financial and
5/12/64 Financial and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
Accounting MainStay VP Series Fund, Inc., and ICAP Funds, Inc. (since
Officer since June 2007); Vice President, Prudential Investments (2000 to
June 2007 2007); Assistant Treasurer, JennisonDryden Family of Funds,
Target Portfolio Trust, The Prudential Series Fund and
American
Skandia Trust (2006 to 2007); Treasurer and Principal
Financial Officer, The Greater China
Fund (2007)
-------------------------------------------------------------------------------------------------
STEPHEN P. President since Senior Managing Director and Chief Marketing Officer, New
FISHER March 2007 York Life Investment Management LLC (since 2005); Managing
2/22/59 Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since March 2007); Managing Director, UBS
Global Asset Management (1999 to 2003)
-------------------------------------------------------------------------------------------------
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration predecessor advisory organizations) (since 2000); Executive
2/8/59 since 2005 Vice President, New York Life Trust Company (since 2006);
Vice President--Administration, Eclipse Funds, Eclipse Funds
Inc. and MainStay VP Series Fund, Inc. (since 2005) and ICAP
Funds, Inc. (since 2006)
-------------------------------------------------------------------------------------------------
</Table>
30 MainStay Mid Cap Growth Fund
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Senior Managing Director and Chief Compliance Officer (since
MICUCCI President and 2006) and Managing Director and Chief Compliance Officer
12/16/65 Chief Compliance (2003 to 2006), New York Life Investment Management LLC and
Officer since New York Life Investment Management Holdings LLC; Senior
2006 Managing Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE Distributors
LLC; Chief Compliance Officer, NYLCAP Manager LLC (since
2006); Senior Vice President and Chief Compliance Officer,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund,
Inc., and ICAP Funds, Inc. (since 2006); Vice President--
Compliance, Eclipse Funds, Eclipse Funds Inc. and MainStay
VP Series Fund, Inc. (2004 to 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002)
-------------------------------------------------------------------------------------------------
MARGUERITE E.H. Secretary since Managing Director and Associate General Counsel, New York
MORRISON* 2004 Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC (since
2005); Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP Funds,
Inc. (since 2006); Chief Legal Officer--Mutual Funds and
Vice President and Corporate Counsel, The Prudential
Insurance Company of America (2000 to 2004)
-------------------------------------------------------------------------------------------------
</Table>
* In addition to serving as Secretary to the Trust, effective January 1, 2008,
Marguerite E.H. Morrison will assume the role of Chief Legal Officer to the
Trust.
Arphiela Arizmendi resigned as Treasurer and Principal Financial and Accounting
Officer of the Trust effective June 7, 2007.
Christopher O. Blunt resigned as President of the Trust effective March 12,
2007.
Alan J. Kirshenbaum resigned as Senior Vice President of the Trust effective
March 19, 2007.
www.mainstayfunds.com 31
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay 130/30 Core Fund
MainStay 130/30 Growth Fund
MainStay All Cap Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay 130/30 High Yield Fund(2)
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay 130/30 International Fund
MainStay Global High Income Fund
MainStay ICAP International Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
RETIREMENT FUNDS
MainStay Retirement 2010 Fund
MainStay Retirement 2020 Fund
MainStay Retirement 2030 Fund
MainStay Retirement 2040 Fund
MainStay Retirement 2050 Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
New York, New York
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
Chicago, Illinois
MACKAY SHIELDS LLC(3)
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
MCMORGAN & COMPANY LLC(3)
San Francisco, California
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
This page intentionally left blank
This page intentionally left blank
This page intentionally left blank
(NEW YORK LIFE INVESTMENT MANAGEMENT LLC LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2007 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO11872 (RECYCLE LOGO) MS329-07 MSMG11-12/07
11
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MID CAP VALUE FUND
Message from the President
and
Annual Report
October 31, 2007
MESSAGE FROM
THE PRESIDENT
The 12-month period ended October 31, 2007, was a dynamic one for mutual fund
investors. U.S. equity markets generally advanced, with growth stocks out-
performing value stocks at all capitalization levels. Although past performance
is no guarantee of future results, international stocks as a whole provided even
stronger returns for U.S. investors.
The progress of the equity markets, however, was far from steady. In February,
weakness in Asian markets led to sharp price declines around the globe. The
correction caused many investors to reconsider whether China and other emerging
economies could sustain their rapid growth. Fortunately, strong
corporate-earnings reports and positive economic news helped the stock market
regain its footing.
In July and August, difficulties in the subprime-mortgage market led to another
stock-market correction. A number of high-profile mortgage originators either
closed their doors or were sold to larger entities. Other leading financial
services firms faced major write-offs because of subprime-mortgage exposure.
The Federal Open Market Committee (FOMC) took prompt action to increase
liquidity and stabilize the financial markets by lowering the discount rate and
the federal funds target rate during the reporting period. These Federal Reserve
moves helped calm investor concerns, and the stock market generally advanced
from August 16, 2007, the date of an unscheduled FOMC meeting, through the end
of October 2007.
Difficulties in the subprime-mortgage market led to a "flight to quality," or a
general movement toward fixed-income securities that carry lower risk. As demand
for short- and intermediate-term Treasury securities increased, yields fell
across much of the maturity spectrum. Yields rose, however, on 20-and 30-year
Treasury bonds, and the yield curve steepened during the 12-month reporting
period.
High-yield bonds rallied from November 2006 through May 2007. But in June and
July, the yield differences--or spreads--between high-yield bonds and comparable
Treasury securities began to widen. At the end of October 2007, these spreads
were wider than when the reporting period began, making high-yield securities
more attractive to investors willing to accept higher risk.
To help investors address the challenges of today's ever-changing markets, New
York Life Investment Management LLC provides access to seven institutional
investment boutiques, each with its own proprietary research and investment
culture. As advisors and subadvisors to MainStay Funds, these boutiques bring a
wealth of experience and market insight to our shareholders. The portfolio
managers of each MainStay Fund seek to consistently apply time-tested investment
principles across a wide variety of market environments.
The report that follows provides more specific information about the market
forces and investment decisions that affected your investment in MainStay Funds
from November 1, 2006, through October 31, 2007. Please read the report
carefully. As you do, bear in mind that this annual report reflects just a short
segment of your lifetime investment journey. We look forward to continuing to
work with you, wherever that journey may lead.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MID CAP VALUE FUND
MainStay Funds
Annual Report
October 31, 2007
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 14
- --------------------------------------------------------------------------------
Notes to Financial Statements 22
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 29
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 30
- --------------------------------------------------------------------------------
Federal Income Tax Information 32
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 32
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 32
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 32
- --------------------------------------------------------------------------------
Trustees and Officers 33
</Table>
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT
MONTH-END PERFORMANCE INFORMATION, PLEASE CALL 1-800-MAINSTAY (1-800-624-6782)
OR VISIT WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
With sales charges 2.64% 13.23% 10.61%
Excluding sales charges 8.61 14.52 11.27
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY MID CAP VALUE FUND RUSSELL MIDCAP VALUE INDEX
--------------------------- --------------------------
6/1/98 9450 10000
9389 9223
11932 9748
14743 10903
14406 10753
13128 10434
16067 13927
18697 16676
20578 18917
23810 22797
10/31/07 25860 26352
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
With sales charges 3.17% 13.44% 10.45%
Excluding sales charges 7.82 13.69 10.45
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY MID CAP VALUE FUND RUSSELL MIDCAP VALUE INDEX
--------------------------- --------------------------
6/1/98 10000 10000
9908 9223
12488 9748
15309 10903
14863 10753
13433 10434
16324 13927
18857 16676
20606 18917
23659 22797
10/31/07 25509 26352
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
With sales charges 6.82% 13.67% 10.44%
Excluding sales charges 7.75 13.67 10.44
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY MID CAP VALUE FUND RUSSELL MIDCAP VALUE INDEX
--------------------------- --------------------------
6/1/98 10000 10000
9908 9223
12488 9748
15309 10903
14863 10753
13433 10434
16324 13927
18857 16676
20606 18917
23659 22797
10/31/07 25493 26352
</Table>
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect maximum applicable sales charges explained in this paragraph, change in
share price, and reinvestment of dividend and capital-gain distributions. The
graphs assume an initial investment of $10,000 and reflect the deduction of all
sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase and have an annual 12b-1 fee of 1.00%.
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee and are generally available to corporate and institutional investors
with a minimum initial investment of $5 million. Class R1 shares are sold with
no initial sales charge or CDSC and have no annual 12b-1 fee. Class R2 shares
are sold with no initial sales charge or CDSC and have an annual 12b-1 fee of
..25%. Class R1 and R2 shares are available only through corporate-sponsored
retirement programs, which include certain minimum program requirements.
Performance figures reflect certain fee waivers and/or expense limitations,
without which total returns may have been lower. These fee waivers and/or
expense limitations are contractual and may be modified or terminated only with
the approval of the Board of Trustees. The Manager may recoup the amount of
certain management fee waivers or expense reimbursements from the Fund pursuant
to the contract if such action does not cause the Fund to exceed existing
expense limitations and the recoupment is made within three years after the year
in which the Manager incurred the expense.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
9.24% 14.96% 11.63%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID CAP VALUE FUND RUSSELL MIDCAP VALUE INDEX
--------------------------- --------------------------
6/1/98 10000 10000
9943 9223
12671 9748
15699 10903
15378 10753
14048 10434
17236 13927
20136 16676
22246 18917
25824 22797
10/31/07 28209 26352
</Table>
CLASS R1 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
9.06% 14.87% 11.53%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID CAP VALUE FUND RUSSELL MIDCAP VALUE INDEX
--------------------------- --------------------------
6/1/98 10000 10000
9940 9223
12653 9748
15659 10903
15324 10753
13984 10434
17146 13927
20016 16676
22087 18917
25645 22797
10/31/07 27968 26352
</Table>
CLASS R2 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
8.84% 14.55% 11.23%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID CAP VALUE FUND RUSSELL MIDCAP VALUE INDEX
--------------------------- --------------------------
6/1/98 10000 10000
9932 9223
12608 9748
15560 10903
15190 10753
13829 10434
16901 13927
19668 16676
21646 18917
25059 22797
10/31/07 27275 26352
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
- -------------------------------------------------------------
Russell Midcap(R) Value Index(1) 9.73% 20.36% 10.84%
Average Lipper mid cap value
fund(2) 12.87 18.92 10.38
</Table>
From inception (6/1/98) through 8/31/98, performance for Class C shares (first
offered 9/1/98) includes the historical performance of Class B shares adjusted
to reflect the applicable CDSC, fees, estimated expenses and fee waivers/expense
limitations of Class C shares upon initial offer. From inception (6/1/98)
through 12/31/03, performance for Class I, R1 and R2 shares (first offered
1/2/04) includes the historical performance of Class A shares adjusted to
reflect the applicable fees, estimated expenses, and fee waivers/expense
limitations of Class I, R1 and R2 shares upon initial offer. Unadjusted, the
performance shown for these new classes of shares might have been lower.
1. The Russell Midcap(R) Value Index is an unmanaged index that measures the
performance of those Russell Midcap(R) companies with lower price-to-book
ratios and lower forecasted growth values. The Russell Midcap(R) Index is an
unmanaged index that measures the performance of the 800 smallest companies
in the Russell 1000(R) Index, which, in turn, is an unmanaged index that
measures the performance of the 1,000 largest U.S. companies based on total
market capitalization. Results assume reinvestment of all income and capital
gains. The Russell Midcap(R) Value Index is considered to be the Fund's
broad-based securities-market index for comparison purposes. An investment
cannot be made directly in an index.
2. Lipper Inc. is an independent monitor of fund performance. Results are based
on total returns with all dividend and capital-gain distributions reinvested.
THE DISCLOSURE ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS
AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Mid Cap Value Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY MID CAP VALUE FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2007, to October 31, 2007,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1,
2007, to October 31, 2007.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six-months ended October 31, 2007. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/07 10/31/07 PERIOD(1) 10/31/07 PERIOD(1)
CLASS A SHARES $1,000.00 $966.90 $ 6.44 $1,018.50 $ 6.61
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $963.05 $10.14 $1,014.75 $10.41
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $962.95 $10.14 $1,014.75 $10.41
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $969.55 $ 3.82 $1,021.15 $ 3.92
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $968.55 $ 4.32 $1,020.65 $ 4.43
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $967.60 $ 5.55 $1,019.40 $ 5.70
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's net annualized expense ratio of each class
(1.30% for Class A, 2.05% for Class B and Class C, 0.77% for Class I, 0.87%
for Class R1 and 1.12% for class R2) multiplied by the average account value
over the period, divided by 365 and multiplied by 184 (to reflect the
one-half year period).
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2007
(COMPOSITION PIE CHART)
<Table>
Common Stocks 94.8
Short-Term Investments (collateral from securities lending is 14.4%) 20.6
Purchased Call Option 0.0*
Written Call Option 0.0*
Liabilities in Excess of Cash and Other Assets (15.4)
</Table>
* Less than one-tenth of a percent.
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2007 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Edison International
2. Teck Cominco, Ltd., Class B
3. Kroger Co. (The)
4. Genworth Financial, Inc., Class A
5. PNC Financial Services Group, Inc.
6. Barr Pharmaceuticals, Inc.
7. BJ Services Co.
8. Aspen Insurance Holdings, Ltd.
9. TJX Cos., Inc.
10. Quest Diagnostics, Inc.
</Table>
8 MainStay Mid Cap Value Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Richard A. Rosen, CFA, and Mark T.
Spellman of MacKay Shields LLC
HOW DID MAINSTAY MID CAP VALUE FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK FOR THE 12-MONTH REPORTING PERIOD?
Excluding all sales charges, MainStay Mid Cap Value Fund returned 8.61% for
Class A shares, 7.82% for Class B shares and 7.75% for Class C shares for the 12
months ended October 31, 2007. Over the same period, the Fund's Class I shares
returned 9.24%, Class R1 shares returned 9.06% and Class R2 shares returned
8.84%. All share classes underperformed the 12.87% return of the average
Lipper(1) mid-cap value fund and the 9.73% return of the Russell Midcap(R) Value
Index(2) for the 12 months ended October 31, 2007. The Russell Midcap(R) Value
Index is the Fund's broad-based securities-market index. See page 5 for Fund
returns with sales charges.
WHICH SECTORS WERE STRONG CONTRIBUTORS DURING THE REPORTING PERIOD AND WHICH
SECTORS WERE WEAK?
Many sectors provided positive contributions to the Fund's performance during
the reporting period. Holdings in the health care and energy sectors were
particularly helpful, and more than offset weaker results from the consumer
discretionary and information technology sectors. Despite these positive
contributions, however, the Fund underperformed its peers and its benchmark.
DURING THE REPORTING PERIOD, WHAT WERE SOME OF THE FUND'S BEST-PERFORMING
INDIVIDUAL STOCKS?
KOS Pharmaceuticals, a maker of cholesterol-lowering drugs, was a strong
contributor to the Fund's performance during the reporting period. In November
2006, the company's shares, which we had purchased earlier in the year, were
acquired for a substantial premium by Abbott Labs. We eliminated the Fund's
entire position in mid-December by sale or tender. Supermarket chain Kroger was
also a strong performer. The company posted better-than-expected sales and
earnings for several consecutive quarters, and the market began to reward
investors with higher valuations. Kroger's restructuring efforts had clearly
begun to pay off, and the company confirmed its ability to compete with
heavyweights like Wal-Mart and Target. We trimmed the Fund's position in Kroger
as its shares approached our price target. Hess, an integrated oil company,
benefited when record high oil prices helped push its share price higher. The
company not only realized higher margins throughout the reporting period but
also increased its reserves with major oil and gas discoveries. We reduced the
Fund's position in Hess as the shares approached our price target late in the
reporting period.
WHICH STOCKS DETRACTED FROM THE FUND'S PERFORMANCE DURING THE REPORTING PERIOD?
PMI Group was particularly weak. In light of difficulties in the mortgage
market, the company's exposure to subprime mortgages raised substantial investor
concerns. Since only 7% of the company's insurance is tied to subprime mortgages
and the stock was selling at a steep discount to book value, we believed that
PMI Group shares offered compelling value. We did reduce the Fund's position
during the reporting period, but the Fund continued to hold a small position in
the company.
Shares of E*Trade, initially purchased in February 2007, also traded lower
because of mortgage-related exposure. We sold the shares in August to reduce
mortgage-market vulnerability and to avoid the potential delays and risks
involved in the company's balance-sheet-restructuring plan. After the Fund's
sale, E*Trade's shares continued to decline sharply.
During the reporting period, shares of semiconductor manufacturer AMD declined
as price competition with rival Intel intensified, placing pressure on AMD's
prices and margins. After reviewing the investment, we concluded that the
company's earnings growth and free cash flow profile were no longer attractive.
In March, we sold the Fund's entire position in the stock.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
In addition to the transactions we've already mentioned, we initiated a number
of new positions in the Fund during the reporting period. These included global
pharmaceutical concern Teva Pharmaceutical Industries, discount retailer TJX,
managed care provider Coventry Health Care and mining machinery and equipment
manufacturer Joy Global.
The principal risk of investing in value stocks is that they may never reach
what the portfolio manager believes is their full value or they may even go down
in value. Mid-capitalization companies are generally less established and their
stocks may be more volatile and less liquid than the securities of large
companies. The Fund may experience a portfolio turnover rate of more than 100%
and may generate taxable short-term capital gains.
1. See footnote on page 6 for more information on Lipper Inc.
2. See footnote on page 6 for more information on the Russell Midcap(R) Value
Index.
www.mainstayfunds.com 9
Among the positions we eliminated from the portfolio were industrial products
distributor W.W. Grainger, oil driller Pride International, newspaper and TV
station owner Tribune and auto parts manufacturer TRW Automotive.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2007, the Fund was overweight relative to the Russell
Midcap(R) Value Index in the health care, energy and industrials sectors. As of
the same date, the Fund was underweight in the financials, utilities, consumer
staples and consumer discretionary sectors.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecasts
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
10 MainStay Mid Cap Value Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (94.8%)+
- -------------------------------------------------------------------------------
AEROSPACE & DEFENSE (2.3%)
Raytheon Co. 121,542 $ 7,731,287
------------
AIRLINES (0.6%)
Delta Air Lines, Inc. (a) 92,900 1,932,320
------------
AUTO COMPONENTS (0.2%)
WABCO Holdings, Inc. 11,500 584,430
------------
BUILDING PRODUCTS (0.4%)
American Standard Cos., Inc. 34,500 1,285,815
------------
CAPITAL MARKETS (1.3%)
Investment Technology Group, Inc. (a) 104,700 4,386,930
------------
CHEMICALS (3.0%)
Arch Chemicals, Inc. 57,882 2,640,577
Chemtura Corp. 273,100 2,545,292
Olin Corp. (b) 211,325 4,813,984
------------
9,999,853
------------
COMMERCIAL BANKS (6.1%)
KeyCorp 158,100 4,497,945
Marshall & Ilsley Corp. 169,243 7,226,676
V PNC Financial Services Group, Inc. 119,600 8,630,336
------------
20,354,957
------------
COMMERCIAL SERVICES & SUPPLIES (3.6%)
Avery Dennison Corp. 90,500 5,239,950
Pitney Bowes, Inc. 166,911 6,683,116
------------
11,923,066
------------
COMPUTERS & PERIPHERALS (1.2%)
Emulex Corp. (a) 183,800 3,981,108
------------
CONSUMER FINANCE (1.2%)
SLM Corp. 85,900 4,051,044
------------
CONTAINERS & PACKAGING (1.4%)
Ball Corp. 94,900 4,705,142
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.2%)
Windstream Corp. 59,360 798,392
------------
ELECTRIC UTILITIES (5.7%)
American Electric Power Co., Inc. 55,000 2,651,550
V Edison International 188,000 10,920,920
Pepco Holdings, Inc. 194,900 5,552,701
------------
19,125,171
------------
</Table>
<Table>
<Caption>
SHARES VALUE
ELECTRONIC EQUIPMENT & INSTRUMENTS (1.5%)
Ingram Micro, Inc. Class A (a) 12,100 $ 257,004
Molex, Inc. Class A 170,800 4,662,840
------------
4,919,844
------------
ENERGY EQUIPMENT & SERVICES (5.0%)
V BJ Services Co. (b) 333,200 8,393,308
Diamond Offshore Drilling, Inc. 31,300 3,544,099
GlobalSantaFe Corp. 59,456 4,817,720
------------
16,755,127
------------
FOOD & STAPLES RETAILING (2.9%)
V Kroger Co. (The) 330,500 9,713,395
------------
FOOD PRODUCTS (1.9%)
General Mills, Inc. 97,100 5,605,583
J.M. Smucker Co. (The) 14,000 748,020
------------
6,353,603
------------
HEALTH CARE PROVIDERS & SERVICES (3.9%)
Coventry Health Care, Inc. (a) 85,900 5,180,629
V Quest Diagnostics, Inc. 145,500 7,737,690
------------
12,918,319
------------
INSURANCE (8.5%)
V Aspen Insurance Holdings, Ltd. (b) 290,300 7,942,608
V Genworth Financial, Inc. Class A 351,900 9,606,870
PartnerRe, Ltd. (b) 90,500 7,534,125
SAFECO Corp. 56,200 3,253,980
------------
28,337,583
------------
IT SERVICES (2.8%)
Affiliated Computer Services, Inc. Class A (a) 105,700 5,354,762
Computer Sciences Corp. (a) 71,152 4,154,565
------------
9,509,327
------------
MACHINERY (3.5%)
Joy Global, Inc. 70,500 4,093,230
Pentair, Inc. (b) 164,900 5,835,811
Timken Co. (The) 55,900 1,859,234
------------
11,788,275
------------
MEDIA (3.7%)
Cinemark Holdings, Inc. (b) 103,300 1,777,793
Gannett Co., Inc. 128,400 5,445,444
Idearc, Inc. 193,200 5,212,536
------------
12,435,773
------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -------------------------------------------------------------------------------
METALS & MINING (2.9%)
V Teck Cominco, Ltd. Class B (b) 194,400 $ 9,720,000
------------
MULTI-UTILITIES (3.2%)
Ameren Corp. 92,200 4,984,332
PG&E Corp. 114,025 5,579,243
------------
10,563,575
------------
OIL, GAS & CONSUMABLE FUELS (5.5%)
Frontier Oil Corp. 80,100 3,667,779
Hess Corp. 106,800 7,647,948
Spectra Energy Corp. 276,700 7,188,666
------------
18,504,393
------------
PHARMACEUTICALS (7.0%)
V Barr Pharmaceuticals, Inc. (a)(b) 147,700 8,466,164
Forest Laboratories, Inc. (a) 183,500 7,169,345
Teva Pharmaceutical Industries, Ltd., Sponsored
ADR (c) 175,600 7,728,156
------------
23,363,665
------------
REAL ESTATE INVESTMENT TRUSTS (3.3%)
Douglas Emmett, Inc. 117,400 3,088,794
General Growth Properties, Inc. (b) 60,248 3,275,081
Highwoods Properties, Inc. (b) 130,763 4,702,237
------------
11,066,112
------------
ROAD & RAIL (1.3%)
CSX Corp. 86,622 3,878,067
Werner Enterprises, Inc. (b) 34,000 646,680
------------
4,524,747
------------
SPECIALTY RETAIL (7.1%)
Bed Bath & Beyond, Inc. (a) 107,100 3,634,974
Gap, Inc. (The) 312,400 5,904,360
V TJX Cos., Inc. 274,400 7,938,392
Williams-Sonoma, Inc. (b) 203,800 6,407,472
------------
23,885,198
------------
THRIFTS & MORTGAGE FINANCE (2.8%)
NewAlliance Bancshares, Inc. (b) 411,500 5,756,885
PMI Group, Inc. (The) 221,200 3,545,836
------------
9,302,721
------------
TRADING COMPANIES & DISTRIBUTORS (0.8%)
WESCO International, Inc. (a)(b) 60,600 2,826,990
------------
Total Common Stocks
(Cost $280,796,359) 317,348,162
------------
<Caption>
NUMBER OF
CONTRACTS VALUE
PURCHASED CALL OPTION (0.0%)++
- -------------------------------------------------------------------------------
PHARMACEUTICALS (0.0%)++
Forest Laboratories, Inc.
Strike Price $35.00
Expire 1/19/08 236 $ 24,190
------------
Total Purchased Call Option
(Premium $83,308) 24,190
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (20.6%)
- -------------------------------------------------------------------------------
COMMERCIAL PAPER (6.2%)
Deutsche Bank Financial LLC
4.77%, due 11/1/07 $4,880,000 4,880,000
General Electric Capital Corp.
4.70%, due 11/1/07 4,000,000 4,000,000
Prudential Funding LLC
4.65%, due 11/1/07 3,000,000 3,000,000
Shell International Finance B.V.
4.70%, due 11/1/07 4,000,000 4,000,000
Toyota Motor Credit Corp.
4.73%, due 11/5/07 5,000,000 4,997,372
------------
Total Commercial Paper
(Cost $20,877,372) 20,877,372
------------
<Caption>
SHARES
INVESTMENT COMPANY (14.4%)
State Street Navigator Securities Lending Prime
Portfolio (d) 48,114,346 48,114,346
------------
Total Investment Company
(Cost $48,114,346) 48,114,346
------------
Total Short-Term Investments
(Cost $68,991,718) 68,991,718
------------
Total Investments
(Cost $349,871,385) 115.4% 386,364,070(e)
Liabilities in Excess of
Cash and Other Assets (15.4) (51,553,730)
------------ ------------
Net Assets 100.0% $334,810,340
============ ============
</Table>
12 MainStay Mid Cap Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
NUMBER OF
CONTRACTS VALUE
WRITTEN CALL OPTION (0.0%)++
- ----------------------------------------------------------------------------
ROAD & RAIL (0.0%)++
CSX Corp.
Strike Price $45.00
Expire 1/19/08 (433) $ (121,240)
------------
Total Written Call Option
(Premium Received $96,124) $ (121,240)
============
</Table>
<Table>
++ Less than one-tenth of a percent.
+++ All of the Fund's assets are maintained to cover "senior securities
transactions" which may include, but are not limited to, forwards, TBA's,
options and futures.
(a) Non-income producing security.
(b) Represents a security, or a portion thereof, which is out on loan. The
aggregate market value of such securities is $46,373,213; cash collateral
of $48,114,346 (included in liabilities) was received with which the Fund
purchased highly liquid short-term investments.
(c) ADR--American Depositary Receipt.
(d) Represents a security, or a portion thereof, purchased with cash collateral
received for securities on loan.
(e) At October 31, 2007, cost is $349,670,780 for federal income tax purposes
and net unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 48,998,953
Gross unrealized depreciation (12,305,663)
-------------------
Net unrealized appreciation $ 36,693,290
===================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 13
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2007
<Table>
ASSETS:
Investment in securities, at value (identified
cost $349,871,385) including $46,373,213
market value of securities loaned $386,364,070
Cash 8,701
Receivables:
Dividends and interest 169,118
Fund shares sold 97,784
Other assets 20,906
-------------
Total assets 386,660,579
-------------
LIABILITIES:
Written options, at value (premiums received
$96,124) 121,240
Securities lending collateral 48,114,346
Payables:
Investment securities purchased 2,200,376
Fund shares redeemed 704,188
Manager (See Note 3) 216,374
NYLIFE Distributors (See Note 3) 195,968
Transfer agent (See Note 3) 182,853
Shareholder communication 78,446
Professional fees 22,084
Trustees 4,804
Custodian 4,628
Accrued expenses 4,932
-------------
Total liabilities 51,850,239
-------------
Net assets $334,810,340
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized $ 198,066
Additional paid-in capital 246,769,262
-------------
246,967,328
Accumulated undistributed net investment
income 671,988
Accumulated net realized gain on investments,
written option transactions and foreign
currency transactions 50,703,455
Net unrealized appreciation on investments and
written option contracts 36,467,569
-------------
Net assets $334,810,340
=============
CLASS A
Net assets applicable to outstanding shares $162,744,865
=============
Shares of beneficial interest outstanding 9,399,200
=============
Net asset value per share outstanding $ 17.31
Maximum sales charge (5.50% of offering price) 1.01
-------------
Maximum offering price per share outstanding $ 18.32
=============
CLASS B
Net assets applicable to outstanding shares $135,958,108
=============
Shares of beneficial interest outstanding 8,227,001
=============
Net asset value and offering price per share
outstanding $ 16.53
=============
CLASS C
Net assets applicable to outstanding shares $ 34,799,039
=============
Shares of beneficial interest outstanding 2,106,103
=============
Net asset value and offering price per share
outstanding $ 16.52
=============
CLASS I
Net assets applicable to outstanding shares $ 1,282,544
=============
Shares of beneficial interest outstanding 72,853
=============
Net asset value and offering price per share
outstanding $ 17.60
=============
CLASS R1
Net assets applicable to outstanding shares $ 2,102
=============
Shares of beneficial interest outstanding 119
=============
Net asset value and offering price per share
outstanding $ 17.64*
=============
CLASS R2
Net assets applicable to outstanding shares $ 23,682
=============
Shares of beneficial interest outstanding 1,359
=============
Net asset value and offering price per share
outstanding $ 17.42*
=============
</Table>
* Difference in the NAV recalculation and NAV stated is caused by rounding
differences.
14 MainStay Mid Cap Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2007
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 6,333,994
Interest 758,986
Income from securities loaned--net 62,919
------------
Total income 7,155,899
------------
EXPENSES:
Manager (See Note 3) 2,575,693
Distribution--Class B (See Note 3) 1,146,279
Distribution--Class C (See Note 3) 293,934
Transfer agent--Classes A, B and C (See Note
3) 1,061,973
Transfer agent--Class I, R1 and R2 (See Note
3) 37
Distribution/Service--Class A (See Note 3) 436,967
Service--Class B (See Note 3) 382,093
Service--Class C (See Note 3) 97,978
Distribution/Service--Class R2 (See Note 3) 52
Shareholder service--Class R1 (See Note 3) 2
Shareholder service--Class R2 (See Note 3) 21
Shareholder communication 101,831
Professional fees 88,965
Registration 77,511
Recordkeeping 63,462
Trustees 20,926
Custodian 17,291
Miscellaneous 22,042
------------
Total expenses before waiver 6,387,057
Expense waiver from Manager (See Note 3) (169,320)
------------
Net expenses 6,217,737
------------
Net investment income 938,162
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, WRITTEN
OPTIONS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain on:
Security transactions $ 50,961,818
Written option transactions 218,888
Foreign currency transactions 44
------------
Net realized gain on investments, written
option transactions and foreign currency
transactions 51,180,750
------------
Net change in unrealized appreciation on:
Security transactions (22,192,815)
Written option contracts (25,116)
------------
Net change in unrealized appreciation on
investments and written option transactions (22,217,931)
------------
Net realized and unrealized gain on
investments, written option transactions and
foreign currency transactions 28,962,819
------------
Net increase in net assets resulting from
operations $ 29,900,981
============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$20,952.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 15
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2007 AND OCTOBER 31, 2006
<Table>
<Caption>
2007 2006
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 938,162 $ 547,479
Net realized gain on investments,
written option transactions and
foreign currency transactions 51,180,750 50,871,988
Net change in unrealized
appreciation on investments and
written option transactions (22,217,931) 3,347,059
----------------------------
Net increase in net assets resulting
from operations 29,900,981 54,766,526
----------------------------
Dividends and distributions to shareholders:
From net investment income:
Class A (513,270) --
Class I (3,299) --
----------------------------
(516,569) --
----------------------------
From net realized gain on
investments:
Class A (23,510,126) (8,621,454)
Class B (22,155,758) (14,396,932)
Class C (5,692,564) (2,932,150)
Class I (93,695) (39,704)
Class R1 (204) (75,079)
Class R2 (1,791) (238,105)
----------------------------
(51,454,138) (26,303,424)
----------------------------
Total dividends and distributions to
shareholders (51,970,707) (26,303,424)
----------------------------
Capital share transactions:
Net proceeds from sale of shares 36,110,258 50,735,833
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions 46,823,486 23,604,965
Cost of shares redeemed (94,599,869) (117,258,294)
Net asset value of shares converted
(See Note 1):
Class A 10,977,281 43,972,388
Class B (10,977,281) (43,972,388)
----------------------------
Decrease in net assets derived
from capital share transactions (11,666,125) (42,917,496)
----------------------------
Net decrease in net assets (33,735,851) (14,454,394)
NET ASSETS:
Beginning of year 368,546,191 383,000,585
----------------------------
End of year $334,810,340 $ 368,546,191
============================
Accumulated undistributed net
investment income at end of year $ 671,988 $ 513,813
============================
</Table>
16 MainStay Mid Cap Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
www.mainstayfunds.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
-------------------------------------------------------------------------------------
JANUARY 1,
2003* YEAR
THROUGH ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of period $ 18.43 $ 17.04 $ 15.71 $ 13.50 $ 11.51 $ 13.47
-------- -------- -------- -------- ----------- ------------
Net investment income (loss) 0.11(a) 0.09(a) 0.03 0.03 0.04 0.06
Net realized and unrealized gain (loss) on
investments 1.37 2.47 1.54 2.18 1.97 (1.90)
-------- -------- -------- -------- ----------- ------------
Total from investment operations 1.48 2.56 1.57 2.21 2.01 (1.84)
-------- -------- -------- -------- ----------- ------------
Less dividends and distributions:
From net investment income (0.05) -- -- -- (0.02) (0.06)
From net realized gain on investments (2.55) (1.17) (0.24) -- -- (0.06)
-------- -------- -------- -------- ----------- ------------
Total dividends and distributions (2.60) (1.17) (0.24) -- (0.02) (0.12)
-------- -------- -------- -------- ----------- ------------
Net asset value at end of period $ 17.31 $ 18.43 $ 17.04 $ 15.71 $ 13.50 $ 11.51
======== ======== ======== ======== =========== ============
Total investment return (b) 8.61% 15.70% 10.06% 16.37% 17.53%(c) (13.67%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.64% 0.54% 0.17% 0.27% 0.45%+ 0.71%
Net expenses 1.30% 1.34% 1.35% 1.43% 1.54%+ 1.50%
Expenses (before waiver/reimbursement) 1.35% 1.43% 1.42% 1.43% 1.54%+ 1.50%
Portfolio turnover rate 54% 44% 49% 33% 30% 46%
Net assets at end of period (in 000's) $162,745 $171,908 $127,680 $116,396 $90,349 $80,442
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------------------------------------
JANUARY 1,
2003* YEAR
THROUGH ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of period $ 17.77 $ 16.59 $ 15.41 $ 13.34 $ 11.42 $ 13.41
------- ------- ------- ------- ----------- ------------
Net investment income (loss) (0.02)(a) (0.03)(a) (0.10) (0.07) (0.03) (0.01)
Net realized and unrealized gain (loss) on
investments 1.32 2.38 1.52 2.14 1.95 (1.92)
------- ------- ------- ------- ----------- ------------
Total from investment operations 1.30 2.35 1.42 2.07 1.92 (1.93)
------- ------- ------- ------- ----------- ------------
Less dividends and distributions:
From net investment income -- -- -- -- -- --
From net realized gain on investments (2.55) (1.17) (0.24) -- -- (0.06)
------- ------- ------- ------- ----------- ------------
Total dividends and distributions (2.55) (1.17) (0.24) -- -- (0.06)
------- ------- ------- ------- ----------- ------------
Net asset value at end of period $ 16.52 $ 17.77 $ 16.59 $ 15.41 $ 13.34 $ 11.42
======= ======= ======= ======= =========== ============
Total investment return (b) 7.75% 14.82% 9.27% 15.52% 16.81%(c) (14.35%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) (0.10%) (0.19%) (0.58%) (0.48%) (0.30%)+ (0.04%)
Net expenses 2.05% 2.09% 2.10% 2.18% 2.29%+ 2.25%
Expenses (before waiver/reimbursement) 2.10% 2.18% 2.17% 2.18% 2.29%+ 2.25%
Portfolio turnover rate 54% 44% 49% 33% 30% 46%
Net assets at end of period (in 000's) $34,799 $39,899 $42,654 $39,884 $33,501 $28,183
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges. Classes I, R1 and R2 are not
subject to sales charge.
(c) Total return is not annualized.
</Table>
18 MainStay Mid Cap Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
-------------------------------------------------------------------------------------
JANUARY 1,
2003* YEAR
THROUGH ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
$ 17.77 $ 16.59 $ 15.41 $ 13.34 $ 11.42 $ 13.41
-------- -------- -------- -------- ----------- ------------
(0.02)(a) (0.03)(a) (0.10) (0.07) (0.03) (0.01)
1.33 2.38 1.52 2.14 1.95 (1.92)
-------- -------- -------- -------- ----------- ------------
1.31 2.35 1.42 2.07 1.92 (1.93)
-------- -------- -------- -------- ----------- ------------
-- -- -- -- -- --
(2.55) (1.17) (0.24) -- -- (0.06)
-------- -------- -------- -------- ----------- ------------
(2.55) (1.17) (0.24) -- -- (0.06)
-------- -------- -------- -------- ----------- ------------
$ 16.53 $ 17.77 $ 16.59 $ 15.41 $ 13.34 $ 11.42
======== ======== ======== ======== =========== ============
7.82% 14.82% 9.27% 15.52% 16.81%(c) (14.35%)
(0.10%) (0.17%) (0.58%) (0.48%) (0.30%)+ (0.04%)
2.05% 2.09% 2.10% 2.18% 2.29%+ 2.25%
2.10% 2.18% 2.17% 2.18% 2.29%+ 2.25%
54% 44% 49% 33% 30% 46%
$135,958 $156,043 $207,348 $191,390 $156,116 $130,024
</Table>
<Table>
<Caption>
CLASS I
-----------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2007 2006 2005 2004
$18.63 $17.16 $15.76 $14.81
------ ------ ------ -----------
0.21(a) 0.16(a) 0.04 0.07
1.39 2.48 1.60 0.88
------ ------ ------ -----------
1.60 2.64 1.64 0.95
------ ------ ------ -----------
(0.08) -- -- --
(2.55) (1.17) (0.24) --
------ ------ ------ -----------
(2.63) (1.17) (0.24) --
------ ------ ------ -----------
$17.60 $18.63 $17.16 $15.76
====== ====== ====== ===========
9.24% 16.08% 10.48% 6.41%(c)
1.16% 0.90% 0.37% 0.70%+
0.77% 0.99% 0.99% 1.00%+
0.81% 1.09% 1.06% 1.00%+
54% 44% 49% 33%
$1,283 $ 682 $ 584 $ 1
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R1
-----------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2007 2006 2005 2004
Net asset value at beginning of period $18.61 $17.14 $15.76 $14.81
------ ------ ------ -----------
Net investment income (loss) 0.19(a) 0.19(a) 0.07 (0.01)
Net realized and unrealized gain on
investments 1.39 2.45 1.55 0.96
------ ------ ------ -----------
Total from investment operations 1.58 2.64 1.62 0.95
------ ------ ------ -----------
Less distributions:
From net realized gain on investments (2.55) (1.17) (0.24) --
------ ------ ------ -----------
Net asset value at end of period $17.64 $18.61 $17.14 $15.76
====== ====== ====== ===========
Total investment return (b) 9.06% 16.11% 10.35% 6.41%(c)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.06% 1.11% 0.43% 0.56%+
Net expenses 0.87% 0.95% 1.09% 1.14%+
Expenses (before waiver/reimbursement) 0.92% 1.01% 1.16% 1.14%+
Portfolio turnover rate 54% 44% 49% 33%
Net assets at end of period (in 000's) $ 2 $ 1 $1,170 $1,075
</Table>
<Table>
** Commencement of operations.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges. Classes I, R1 and R2 are not
subject to sales charge.
(c) Total return is not annualized.
</Table>
20 MainStay Mid Cap Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R2
-----------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2007 2006 2005 2004
$18.44 $17.04 $15.71 $14.81
------ ------ ------ -----------
0.15(a) 0.13(a) 0.01 (0.02)
1.38 2.44 1.56 0.92
------ ------ ------ -----------
1.53 2.57 1.57 0.90
------ ------ ------ -----------
(2.55) (1.17) (0.24) --
------ ------ ------ -----------
$17.42 $18.44 $17.04 $15.71
====== ====== ====== ===========
8.84% 15.77% 10.06% 6.08%(c)
0.84% 0.77% 0.09% 0.26%+
1.12% 1.23% 1.34% 1.44%+
1.16% 1.28% 1.41% 1.44%+
54% 44% 49% 33%
$ 24 $ 13 $3,564 $ 837
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises nineteen funds (collectively referred to as the
"Funds"). These financial statements and notes relate only to MainStay Mid Cap
Value Fund (the "Fund"), a diversified fund.
The Fund currently offers six classes of shares. Class A shares and Class B
shares commenced on June 1, 1998. Class C shares commenced on September 1, 1998.
Class I shares, Class R1 shares and Class R2 shares commenced on January 2,
2004. Class A shares are offered at net asset value per share plus an initial
sales charge. No sales charge applies on investments of $1 million or more (and
certain other qualified purchases) in Class A shares, but a contingent deferred
sales charge is imposed on certain redemptions of such shares within one year of
the date of purchase. Class B shares and Class C shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within up to six years of purchase of Class B
shares and a 1% contingent deferred sales charge may be imposed on redemptions
made within one year of purchase of Class C shares. Class I, Class R1 and Class
R2 shares are not subject to a sales charge. As approved by the Board of
Trustees in 1997, Class B shares convert to Class A shares eight years after the
date they were purchased. The six classes of shares bear the same voting (except
for issues that relate solely to one class), dividend, liquidation and other
rights and conditions except that Class B and Class C shares are subject to
higher distribution fee rates than Class A and Class R2 shares under a
distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I and Class
R1 shares are not subject to a distribution or service fee. Class R1 and Class
R2 shares are authorized to pay to New York Life Investment Management LLC, its
affiliates, or third-party service providers, as compensation for services
rendered to shareholders of Class R1 or Class R2 shares, a shareholder service
fee.
The Fund's investment objective is to realize maximum long-term total return
from a combination of capital appreciation and income.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). Securities that are not traded on the valuation date are
valued at the mean of the latest quoted bid and asked prices. Prices normally
are taken from the principal market in which each security trades. Options
contracts are valued at the last posted settlement price on the market where
such options are principally traded. Investments in mutual funds are valued at
their net asset value as of the close of the New York Stock Exchange on the date
of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: a security the trading for which has been
halted or suspended; a debt security that has recently gone into default and for
which there is not a current market quotation; a security of an issuer that has
entered into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; a security where the trading on that security's principal market
is temporarily closed at a time when, under normal conditions, it would be open.
At October 31, 2007, the Fund did not hold securities that were valued in such a
manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
of net investment income and distributions of net realized capital and currency
gains, if any, annually. All dividends and distributions are reinvested in
shares of the Fund, at net asset value, unless the shareholder elects
22 MainStay Mid Cap Value Fund
otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America. Permanent
book/tax differences relating to income and gains are reclassified amongst
undistributed net investment income, accumulated net realized gain or loss and
paid-in-capital.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities
purchased, other than short-term securities, for the Fund are accreted and
amortized, respectively, on the effective interest rate method over the life of
the respective securities or, in the case of a callable security, over the
period to the first date of call. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B) on
page 25) are allocated to separate classes of shares pro rata based upon their
relative net assets value on the date the expenses are incurred. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. Premiums are received
and are recorded as liabilities. The liabilities are subsequently adjusted and
unrealized appreciation or depreciation is recorded to reflect the current value
of the options written. Premiums received from writing options which expire are
treated as realized gains. Premiums received from writing options which are
exercised or are canceled in closing purchase transactions are added to the
proceeds or netted against the amount paid on the transaction to determine the
realized gain or loss. By writing a covered call option, in exchange for the
premium, the Fund foregoes the opportunity for capital appreciation above the
exercise price should the price of the underlying security or foreign currency
increase. By writing a covered put option, the Fund, in exchange for the
premium, accepts the risk of a decline in the market value of the underlying
security or foreign currency below the exercise price. A call option may be
covered by the call writer's owning the underlying security throughout the
option period. A call option may also be covered by the call writer's
maintaining liquid assets valued at greater than the exercise price of the call
written. When writing a covered call option, the Fund, in return for the premium
on the option, gives up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as the obligation
as the writer continues, has retained the risk of loss should the price of the
underlying security decline. After writing a put option, the Fund may incur a
loss equal to the difference between the exercise price of the option and the
sum of the market value of the underlying security plus the premium received
from the sale of the option.
The Fund may purchase call and put options on its portfolio securities. The Fund
may purchase call options to protect against an increase in the price of the
security it anticipates purchasing. The Fund may purchase put options on its
securities to protect against a decline in the value of the security or to close
out covered written put positions. The Fund may also purchase options to seek to
enhance returns. Risks may arise from an imperfect correlation between the
change in market value of the securities held by the Fund and the prices of
options relating to the securities purchased or sold by the Fund and from the
possible lack of a liquid secondary market for an option. The maximum exposure
to loss for any purchased option is limited to the premium initially paid for
the option. (See Note 5 on page 26.)
(H) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Prices of securities denominated in foreign currency amounts
are translated into U.S. dollars at the mean between the buying and selling
rates last quoted by any major U.S. bank at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date,
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities are presented at the exchange rates and market values
at the close of the period. The realized and unrealized changes in net assets
arising from fluctuations in exchange rates and market prices of securities are
not separately presented.
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains or losses
realized as a result of differences between the amounts of securities sale
proceeds or purchase cost, dividends, interest and withholding taxes as recorded
on the Fund's books, and the U.S. dollar equivalent amount actually received or
paid. Net currency gains or losses from valuing such foreign currency
denominated assets and liabilities, other than investments at valuation date
exchange rates, are reflected in unrealized foreign exchange gains or losses.
(I) SECURITIES LENDING. In order to realize additional income the Fund may lend
its securities to broker-dealers and financial institutions. The loans are
collateralized by cash or securities at least equal at all times to the market
value of the securities loaned. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. The Fund may bear
the risk of delay in recovery of, or loss of rights in, the securities loaned
should the borrower of the securities experience financial difficulty. The Fund
receives compensation for lending its securities in the form of fees or it
retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(J) INDEMNIFICATIONS. In the normal course of business, the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote.
However, there can be no assurance that material liabilities related to such
obligations will not arise in the future which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager") a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. NYLIM provides offices and conducts clerical, recordkeeping and
bookkeeping services, and is responsible for the financial and accounting
records required to be maintained by the Fund. NYLIM also pays the salaries and
expenses of all personnel affiliated with the Fund and all the operational
expenses that are not the responsibility of the Fund. MacKay Shields LLC (the
"Subadvisor"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life, serves as subadvisor to the Fund and is responsible
for the day-to-day portfolio management of the Fund. Pursuant to the terms of a
Subadvisory Agreement between NYLIM and the Subadvisor, NYLIM pays for the
services of the Subadvisor.
The Fund is contractually obligated to pay NYLIM a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.70% on assets up to $500 million and 0.65% on assets in
excess of $500 million.
Effective March 1, 2007, NYLIM has entered into a written expense limitation
agreement under which it has agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses (total annual operating expenses
excluding taxes, interest, litigation, extraordinary expenses, and brokerage and
other transaction expenses relating to the purchase or sale of portfolio
investments) do not exceed the following amounts of average daily net assets for
each class: Class A, 1.30%; Class B, 2.05%; Class C, 2.05%; Class I, 0.78%;
Class R1, 0.88% and Class R2, 1.13%. This expense limitation may be modified or
terminated only with the approval of the Board of Trustees. NYLIM may recoup the
amount of any management fee waivers or expense reimbursements from the Fund
pursuant to the agreement if such action does not cause the Fund to exceed
existing expense limitations and the recoupment is made within three years after
the year in which NYLIM incurred the expense.
For the year ended October 31, 2007, NYLIM earned fees from the Fund in the
amount of $2,575,693 and waived its fees in the amount of $169,320.
As of October 31, 2007, the amounts of waived fees that are subject to possible
recoupment by NYLIM, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 2010 TOTAL
$130,177 $347,680 $169,320 $647,177
-----------------------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Prior to March 1, 2007, NYLIM had an agreement in place under which it had
agreed to waive a portion of the Fund's management fee or reimburse the expenses
of the Fund so that the Fund's total ordinary operating expenses did not exceed
1.30% of the Fund's average daily net assets for its Class A shares. NYLIM also
applied an equivalent waiver or reimbursement, in an equal amount of basis
points, to the other share classes of the Fund.
24 MainStay Mid Cap Value Fund
State Street Bank & Trust Company ("SSBT"), One Lincoln Street, Boston,
Massachusetts, 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with NYLIM. These services include calculating
daily net asset values of the Fund, maintaining general ledger and sub-ledger
accounts for the calculation of the Fund's respective net asset values, and
assisting NYLIM in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, SSBT is compensated by
NYLIM.
(B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has a Distribution Agreement with NYLIFE Distributors LLC (the
"Distributor"), an indirect wholly-owned subsidiary of New York Life. The Fund,
with respect to Class A, Class B, Class C, and Class R2 shares, has adopted
distribution plans (the "Plans") in accordance with the provisions of Rule 12b-1
under the 1940 Act.
Pursuant to the Class A and Class R2 Plans, the Distributor receives a monthly
distribution fee from the Fund at an annual rate of 0.25% of the average daily
net assets of the Fund's Class A and Class R2 shares, which is an expense of the
Class A and Class R2 shares of the Fund for distribution or service activities
as designated by the Distributor. Pursuant to the Class B and Class C Plans, the
Fund pays the Distributor a monthly distribution fee, which is an expense of the
Class B and Class C shares of the Fund, at the annual rate of 0.75% of the
average daily net assets of the Fund's Class B and Class C shares. The Plans
provide that the Class B and Class C shares of the Fund also incur a service fee
at the annual rate of 0.25% of the average daily net asset value of the Class B
and Class C shares of the Fund. Class I and Class R1 shares are not subject to a
distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
In accordance with the Shareholder Services Plans for the Class R1 and Class R2
shares, the Manager has agreed to provide, through its affiliates or independent
third parties, various shareholder and administrative support services to
shareholders of the Class R1 and Class R2 shares. For its services, the Manager
is entitled to a Shareholder Service Fee accrued daily and paid monthly at an
annual rate of 0.10% of the average daily net assets attributable to the Class
R1 and Class R2 shares.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $50,794 for the year ended
October 31, 2007. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $3,179, $177,971 and $2,582, respectively, for the year ended October
31, 2007.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund, for the year ended October 31, 2007,
amounted to $1,062,010.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts, effective March 1, 2007. Shareholders with an account
balance of less than $1,000 are charged an annual per account fee of $20
(assessed semi-annually).
(F) CAPITAL. At October 31, 2007, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $ 436 0.0*%
- -------------------------------------------------------------------
Class C 231 0.0*
- -------------------------------------------------------------------
Class I 1,491 0.1
- -------------------------------------------------------------------
Class R1 1,487 70.7
- -------------------------------------------------------------------
Class R2 1,471 6.2
- -------------------------------------------------------------------
</Table>
* Less than one-tenth of a percent.
(G) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2007, these fees, which are included in professional fees
shown on the Statement of Operations, were $13,936.
The Fund pays the Manager a monthly fee for certain pricing and recordkeeping
services provided under the Accounting Agreement at the annual rate of 1/20 of
1% for the first $20 million of average monthly net assets, 1/30 of 1% of the
next $80 million of average monthly net assets and 1/100 of 1% of any amount in
excess of $100 million of average monthly net assets. Fees for these services
provided to the Fund by the Manager amounted to $63,462 for the year ended
October 31, 2007.
www.mainstayfunds.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2007, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL GAIN TEMPORARY APPRECIATION ACCUMULATED
INCOME (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$671,988 $50,502,850 $ -- $36,668,174 $87,843,012
--------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized appreciation is
primarily due to wash sales deferrals non-taxable dividends and straddle loss
deferrals.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated undistributed
net realized gain on investments arising from permanent differences; net assets
at October 31, 2007 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED UNDISTRIBUTED NET ADDITIONAL
NET INVESTMENT REALIZED GAIN (LOSS) PAID-IN
INCOME (LOSS) ON INVESTMENTS CAPITAL
$ (263,418) $263,418 $ --
------------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to real estate investment
gain (loss), foreign currency transactions, and prior year REIT adjustments.
The tax character of distributions paid during the years ended October 31, 2007
and October 31, 2006, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2007 2006
Distributions paid from:
Ordinary Income $ 516,569 $ --
Long-Term Capital Gains 51,454,138 26,303,424
- ----------------------------------------------------------------
$51,970,707 $26,303,424
- ----------------------------------------------------------------
</Table>
NOTE 5--WRITTEN OPTIONS:
During the year ended October 31, 2007, the Fund had the following transactions
in written options:
<Table>
<Caption>
NUMBER OF
CONTRACTS PREMIUM
Options Outstanding at October 31, 2006 -- $ --
- -----------------------------------------------------------------------
Options--Written (433) (96,124)
- -----------------------------------------------------------------------
Options--Expired -- --
- -----------------------------------------------------------------------
Options--Canceled in closing transactions -- --
- -----------------------------------------------------------------------
Options Outstanding at October 31, 2007 (433) ($96,124)
- -----------------------------------------------------------------------
</Table>
NOTE 6--CUSTODIAN:
SSBT is the custodian of cash and securities of the Fund. Custodial fees are
charged to the Fund based on the market value of securities in the Fund and the
number of certain cash transactions incurred by the Fund.
NOTE 7--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. These funds pay a commitment fee, at an annual rate of .060% of the
average commitment amount, regardless of usage, to The Bank of New York, which
acts as agent to the syndicate. Such commitment fees are allocated among the
funds based upon net assets and other factors. Interest on any revolving credit
loan is charged based upon the Federal Funds Advances rate. There were no
borrowings made or outstanding on the line of credit during the year ended
October 31, 2007.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2007 purchases and sales of securities, other
than short-term securities, were $190,060 and $257,604, respectively.
NOTE 9--CAPITAL SHARE TRANSACTIONS
(IN 000'S):
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 1,187 $ 20,803
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,296 21,740
Shares redeemed (3,043) (53,127)
-------------------
Net decrease in shares outstanding
before conversion (560) (10,584)
Shares converted from Class B (See
Note 1) 630 10,977
-------------------
Net increase 70 $ 393
===================
Year ended October 31, 2006:
Shares sold 1,866 $ 32,693
Shares issued to shareholders in
reinvestment of distributions: 448 7,506
Shares redeemed (3,102) (54,751)
-------------------
Net increase (decrease) in shares
outstanding before conversion (788) (14,552)
Shares converted from Class B (See
Note 1) 2,625 43,972
-------------------
Net increase 1,837 $ 29,420
===================
</Table>
26 MainStay Mid Cap Value Fund
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 699 $ 11,723
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,268 20,369
Shares redeemed (1,863) (31,282)
--------------------
Net increase in shares outstanding
before conversion 104 810
Shares reacquired upon conversion into
Class A (See Note 1) (658) (10,977)
--------------------
Net decrease (554) $(10,167)
====================
Year ended October 31, 2006:
Shares sold 710 $ 12,092
Shares issued to shareholders in
reinvestment of distributions: 822 13,348
Shares redeemed (2,546) (43,255)
--------------------
Net decrease in shares outstanding
before conversion (1,014) (17,815)
Shares reacquired upon conversion into
Class A (See Note 1) (2,706) (43,972)
--------------------
Net decrease (3,720) $(61,787)
====================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 179 $ 2,998
Shares issued to shareholders in
reinvestment of dividends and
distributions 287 4,616
Shares redeemed (606) (10,139)
---------------------
Net decrease (140) $ (2,525)
=====================
Year ended October 31, 2006:
Shares sold 292 $ 4,959
Shares issued to shareholders in
reinvestment of distributions: 148 2,397
Shares redeemed (766) (13,019)
---------------------
Net decrease (326) $ (5,663)
=====================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 32 $ 545
Shares issued to shareholders in
reinvestment of dividends and
distributions 5 97
Shares redeemed (1) (23)
---------------------
Net increase 36 $ 619
=====================
Year ended October 31, 2006:
Shares sold --(a) $ 5
Shares issued to shareholders in
reinvestment of distributions: 2 40
Shares redeemed (--)(a) (1)
---------------------
Net increase 2 $ 44
=====================
</Table>
<Table>
<Caption>
CLASS R1 SHARES AMOUNT
Year ended October 31, 2007:
Shares sold --(a) $ 1
Shares issued to shareholders in
reinvestment of dividends and
distributions --(a) --(a)
Shares redeemed (--)(a) (--)(a)
---------------------
Net increase --(a) $ 1
=====================
Year ended October 31, 2006:
Shares sold 1 $ 21
Shares issued to shareholders in
reinvestment of distributions: 5 75
Shares redeemed (74) (1,284)
---------------------
Net decrease (68) $ (1,188)
=====================
</Table>
<Table>
<Caption>
CLASS R2 SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 2 $ 40
Shares issued to shareholders in
reinvestment of dividends and
distributions --(a) 2
Shares redeemed (2) (29)
--------------------
Net increase --(a) $ 13
====================
Year ended October 31, 2006:
Shares sold 55 $ 966
Shares issued to shareholders in
reinvestment of distributions: 14 239
Shares redeemed (278) (4,948)
--------------------
Net decrease (209) $ (3,743)
====================
</Table>
<Table>
(a) Less than one thousand.
</Table>
NOTE 10--OTHER MATTERS:
In 2004 the Securities and Exchange Commission ("SEC") raised concerns relating
to a guarantee provided to shareholders of the MainStay Equity Index Fund and
the fees and expenses of that Fund, as well as the related guaranteed disclosure
to that fund's shareholders. Discussions have been held with the SEC concerning
a possible resolution of this matter. There can be no assurance at this time as
to the outcome of these efforts.
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS:
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation becomes effective for the
www.mainstayfunds.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Fund's 2008 fiscal year, and is to be applied to all open tax years as of the
date of effectiveness. Based on Management's analysis, the determination has
been made that the adoption of the interpretation on November 1, 2007 did not
have an impact on the Fund's financial statements upon adoption. Management
continually reviews the Fund's tax positions and such conclusions under the
Interpretation based on factors, including, but not limited to, ongoing analyses
of tax laws, regulations and interpretations, thereof.
In September 2006, the FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The changes to current generally accepted accounting
principles from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures
about fair value measurements. As of October 31, 2007, the Fund does not believe
the adoption of SFAS No. 157 will impact the amounts reported in the Fund's
financial statements. However, additional disclosures may be required about the
inputs used to develop the measurements and the effect of certain measurements
reported in the financial statements for a fiscal period.
28 MainStay Mid Cap Value Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Mid Cap Value Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2007, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years or periods in the four-year
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the periods presented through October 31,
2003, were audited by other auditors, whose report dated December 18, 2003,
expressed an unqualified opinion thereon.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2007, by correspondence with the custodian
and brokers or by appropriate auditing procedures where replies from brokers
were not received. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Mid Cap Value Fund of The MainStay Funds as of October 31, 2007, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years or periods in the four-year period then ended,
in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 20, 2007
www.mainstayfunds.com 29
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with New York Life Investment Management LLC (the "Manager") and the
Subadvisory Agreement between the Manager and MacKay Shields LLC, a wholly-owned
indirect subsidiary of New York Life Investment Management Holdings LLC, an
affiliate of the Manager, (the "Subadvisor"), (each an "Agreement") at a meeting
held on May 22 and 23, 2007. In connection with the approval of each Agreement,
the Trustees reviewed a significant amount of a wide variety of information that
they had requested and received from the Manager and the Subadvisor, and data
and analysis from an outside data provider and a third party consultant. The
Trustees considered various industry trends and regulatory developments in their
deliberations. In considering approval of each Agreement, and in evaluating the
fairness of the compensation to be paid by the Fund, the Trustees met both as a
full Board and in executive session with no Interested Trustee present, in
advance of the meeting at which the Agreements were approved, and they
considered a number of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and the Subadvisor have provided historically to the Fund, and
also generally to other series of the Trust. Among other services, the Manager's
services have included investment management services, including monitoring and
evaluating the Subadvisor's investment program and investment results with
respect to the Fund, and the Subadvisor's compliance with the Fund's investment
policies and restrictions, and administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets,
and its other services include, among other services, providing reports to the
Manager and reviewing certain aspects of Fund filings. The Trustees considered,
among other things, the Manager's and Subadvisor's management, personnel,
resources, operations and portfolio management capabilities. The Board reviewed
reports on the Subadvisor's brokerage practices, including with respect to best
execution of portfolio trades. The Trustees considered the Manager's supervision
of the Fund's service providers and its attention to the compliance program of
the Trust, the Manager, the Subadvisor and certain other service providers, as
well as the Subadvisor's attention to its compliance program. The Trustees noted
the generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's underperformance
relative to certain measures over several timeperiods and its modest improvement
since a portfolio manager change in the past two years.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information that indicated that the profitability to the Manager and its
affiliates from the Management Agreement with respect to the Fund was moderate,
and from the overall relationship with the Trust was low. The Trustees
considered other benefits that the Manager and its affiliates receive from the
relationship with the Trust, including benefits that NYLIFE Distributors and
MainStay Shareholder Services receive in exchange for services they provide to
the Funds, and certain benefits from soft dollar arrangements. The Trustees
acknowledged certain benefits to the reputation of the Manager and the Trust
from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They considered that, across the Trust
(though not every series or share class), gross transfer agency fees tended to
be relatively high and, therefore, adversely affected gross expense ratios.
Noting that the Trust historically permitted smaller investor accounts, the
Trustees considered measures that had been recently implemented that were
intended to increase the average size of shareholder accounts, including
generally higher investment minimums, and small account fees, and the Trustees
considered potential benefits to the Manager and its affiliates arising from
such measures.
30 MainStay Mid Cap Value Fund
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the Manager's willingness to implement
contractual breakpoints that would reduce the Fund's management fee at asset
levels above the breakpoints, and the fact that the breakpoints were intended to
provide that shareholders would share in benefits from economies of scale
obtained through the growth in the Fund's assets. The Trustees noted that the
Fund not reached the asset level at which breakpoints would reduce the Fund's
management fee rate. The Trustees reviewed information about the potential
effect of asset growth on Fund expenses, the difficulty of forecasting its
effect on the profitability of the Manager and its affiliates, and the
management fee breakpoints applicable to the Fund and certain other funds. It
was noted that, to the extent the Fund's gross expenses currently were higher
than its net expenses, the reduction of the Fund's gross expenses through the
achievement of economies of scale might benefit the Manager by reducing the
expenses the Manager must reimburse to the Fund rather than directly benefiting
the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by the
Fund, the Trustees evaluated factors such as the fees and expenses borne by
other registered funds in the market pursuing strategies generally similar to
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts having investment strategies similar to that
of the Fund, and took account of explanations and other information relating to
the fees and expenses of those other funds and accounts. The Trustees considered
the current and proposed contractual and net management fees, its anticipated
gross and net expense ratio, and various components of the expense ratio, in
comparison to other funds in comparison groupings. The Trustees generally
acknowledged the historical relationships among the Manager, the Subadvisor and
the Trust and the likely difficulties in implementing an alternative to the
investment management arrangement between the Trust and the Manager. The
Trustees took account of the Manager's willingness to maintain the management
fee waiver and expense limitation applicable to the Fund.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings, with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. This summary set out
above describes the most important, but not all, of the factors considered by
the Trustees in considering each Agreement. On the basis of their review, a
majority of the Trustees and a majority of the Non-Interested Trustees concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the judgment of a
majority of the Trustees and a majority of the Non-Interested Trustees that
approval of each Agreement was in the best interests of the Fund and its
shareholders.
www.mainstayfunds.com 31
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advise shareholders within
60 days of the Fund's fiscal year end (October 31, 2007) as to the federal tax
status of dividends paid by the Fund during such fiscal year. Accordingly, the
Fund paid long-term capital gain distributions of $51,454,138.
The dividends paid by the Fund during the fiscal year ended October 31, 2007,
should be multiplied by 100.0% to arrive at the amount eligible for qualified
dividend income, 33.2% for qualified interest income and 100.0% for the
corporate dividends received deduction.
In January 2008, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2007. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2007.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
or (iii) on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 1-800-MAINSTAY (1-800-624-6782). You also can obtain and review copies
of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC
(information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330).
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of The MainStay Funds (the
"Trust") was held on May 4, 2007, at the offices of New York Life Investment
Management LLC in Parsippany, New Jersey. The purpose of the meeting was to
elect the following individuals to the Board of Trustees of the Trust:
- Susan B. Kerley
- Alan R. Latshaw
- Peter Meenan
- Richard H. Nolan, Jr.
- Richard S. Trutanic
- Roman L. Weil
- John A. Weisser
- Brian A. Murdock (Interested Trustee)
There are no other Trustees of the Trust.
No other business came before the special meeting. The proposal to elect
Trustees was passed by the shareholders of the Fund as shown below:
<Table>
<Caption>
MID CAP VOTES VOTES
VALUE FUND FOR WITHHELD ABSTENTIONS TOTAL
Susan B.
Kerley 10,713,287.531 68,943.880 18,199.000 10,800,430.411
- -------------------------------------------------------------------------
Alan R.
Latshaw 10,713,779.668 68,451.743 18,199.000 10,800,430.411
- -------------------------------------------------------------------------
Peter Meenan 10,714,709.796 67,521.615 18,199.000 10,800,430.411
- -------------------------------------------------------------------------
Richard H.
Nolan, Jr. 10,714,588.043 67,643.368 18,199.000 10,800,430.411
- -------------------------------------------------------------------------
Richard S.
Trutanic 10,712,248.999 69,982.412 18,199.000 10,800,430.411
- -------------------------------------------------------------------------
Roman L. Weil 10,714,261.352 67,970.059 18,199.000 10,800,430.411
- -------------------------------------------------------------------------
John A.
Weisser 10,717,354.917 64,876.494 18,199.000 10,800,430.411
- -------------------------------------------------------------------------
Brian A.
Murdock 10,715,655.250 66,576.161 18,199.000 10,800,430.411
- -------------------------------------------------------------------------
</Table>
This resulted in approval of the proposal.
32 MainStay Mid Cap Value Fund
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Pursuant to
notice, a Special Meeting of Shareholders of the Trust was held on May 4, 2007,
at NYLIM's offices in Parsippany, New Jersey. The Trustees listed below were
elected to serve the Trust effective June 7, 2007.
Each Trustee serves until his or her successor is elected and qualified or until
his or her resignation, death or removal. The Retirement Policy provides that a
Trustee shall tender his or her resignation upon reaching age 72. A Trustee
reaching the age of 72 may continue for additional one-year periods with the
approval of the Board's Nominating and Governance Committee, except that no
Trustee shall serve on the Board past his or her 75th birthday. Officers serve a
term of one year and are elected annually by the Trustees. The business address
of each Trustee and officer listed below is 51 Madison Avenue, New York, New
York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF FUNDS
POSITION(S) HELD IN FUND COMPLEX
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
BRIAN A. MURDOCK Indefinite; Member of the Board of Managers 73 Trustee, Eclipse Funds since
3/14/56 Trustee and Chief and President (since 2004) and June, 2007 (3 funds); Director,
Executive Officer Chief Executive Officer (since Eclipse Funds Inc. since June
since 2006 2006), New York Life Investment 2007 (22 funds); Director,
Management LLC and New York MainStay VP Series Fund, Inc.,
Life Investment Management since 2006 (24 portfolios);
Holdings LLC; Senior Vice Director, ICAP Funds, Inc.,
President, New York Life since 2006 (3 funds)
Insurance Company (since 2004);
Chairman of the Board and
President, NYLIFE Distributors
LLC (since 2004); Member of the
Board of Managers, NYLCAP
Manager LLC and Madison Capital
Funding LLC (since 2004),
MacKay Shields LLC and
Institutional Capital LLC
(since 2006), and McMorgan &
Company LLC (since 2007); Chief
Executive Officer, Eclipse
Funds and Eclipse Funds Inc.
(since 2006); Chairman (2006 to
2007) and Director and Chief
Executive Officer (since 2006),
MainStay VP Series Fund, Inc.;
Director and Chief Executive
Officer, ICAP Funds, Inc.
(since 2006); Chief Investment
Officer, MLIM Europe and Asia
(2001 to 2003); President of
Merrill Japan and Chairman of
MLIM's Pacific Region (1999 to
2001)
-----------------------------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow Capital
Management, Inc., McMorgan & Company LLC, NYLIFE Securities Inc. and/or NYLIFE
Distributors LLC, as described in detail above in the column "Principal
Occupation(s) During Past Five Years."
www.mainstayfunds.com 33
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. KERLEY Indefinite; Partner, Strategic Management 73 Chairman since 2005 and Trustee
8/12/51 Chairman and Advisors LLC (since 1990) since 2000, Eclipse Funds (3
Trustee since funds); Chairman since 2005 and
June 2007 Director since 1990, Eclipse
Funds Inc. (22 funds); Chairman
and Director, ICAP Funds, Inc.,
since 2006 (3 funds); Chairman
and Director, MainStay VP
Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
Legg Mason Partners Funds,
Inc., since 1991 (30
portfolios)
----------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & Young 73 Trustee, Eclipse Funds since
3/27/51 Trustee and Audit LLP (2002 to 2003); Partner, June 2007 (3 funds); Director,
Committee Arthur Andersen LLP (1989 to Eclipse Funds Inc. since June
Financial Expert 2002); Consultant to the Audit 2007 (22 funds); Director, ICAP
since 2006 and Compliance Committee of The Funds, Inc., since June 2007 (3
MainStay Funds (2004 funds); Director, MainStay VP
to 2006) Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
State Farm Associates Funds
Trusts since 2005 (3
portfolios); Trustee, State
Farm Mutual Fund Trust since
2005 (15 portfolios); Trustee,
State Farm Variable Product
Trust since 2005 (9 portfolios)
----------------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds since
12/5/41 Trustee since President and Chief Executive 2002 (3 funds); Director,
June 2007 Officer, Babson-United, Inc. Eclipse Funds Inc. since 2002
(financial services firm) (2000 (22 funds); Director, ICAP
to 2004); Independent Funds, Inc., since 2006 (3
Consultant (1999 to 2000); Head funds); Director, MainStay VP
of Global Funds, Citicorp (1995 Series Fund, Inc., since June
to 1999) 2007 (24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 73 Trustee, Eclipse Funds since
NOLAN, JR. Trustee since Management; President--Shields/ June 2007 (3 funds); Director,
11/16/46 June 2007 Alliance, Alliance Capital Eclipse Funds Inc. since June
Management (1994 to 2004) 2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 2006
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman (since 1990) and Chief 73 Trustee, Eclipse Funds since
TRUTANIC Trustee since Executive Officer (1990 to June 2007 (3 funds); Director,
2/13/52 1994 1999), Somerset Group Eclipse Funds Inc. since June
(financial advisory firm); 2007 (22 funds); Director, ICAP
Managing Director and Advisor, Funds, Inc., since June 2007 (3
The Carlyle Group (private funds); Director, MainStay VP
investment firm) (2002 to Series Fund, Inc., since June
2004); Senior Managing Director 2007 (24 portfolios)
and Partner, Groupe Arnault
S.A. (private investment firm)
(1999 to 2002)
----------------------------------------------------------------------------------------------------------------------
</Table>
34 MainStay Mid Cap Value Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEE
ROMAN L. WEIL Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds since
5/22/40 Trustee and Audit Accounting, Graduate School of June 2007 (3 funds); Director,
Committee Business, University of Eclipse Funds Inc. since June
Financial Expert Chicago; President, Roman L. 2007 (22 funds); Director, ICAP
since June 2007 Weil Associates, Inc. Funds, Inc., since June 2007 (3
(consulting firm) funds); Director, MainStay VP
Series Fund, Inc., since 1994
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 73 Trustee, Eclipse Funds since
10/22/41 Trustee since Salomon Brothers, Inc. (1971 to June 2007 (3 funds); Director,
June 2007 1995) Eclipse Funds Inc. since June
2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 1997
(24 portfolios); Trustee,
Direxion Funds (69 funds) and
Direxion Insurance Trust (45
funds) since March 2007
----------------------------------------------------------------------------------------------------------------------
</Table>
Terry L. Lierman resigned as Trustee of the Trust effective May 31, 2007. Edward
J. Hogan, John B. McGuckian and Donald E. Nickelson resigned as Trustees of the
Trust effective June 7, 2007.
At a meeting of the Board of Trustees held on June 7 and 8, 2007, the following
individuals were appointed to serve as Officers of the Trust effective June 7,
2007:
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ROBERT A. Chief Legal Senior Managing Director, General Counsel and Secretary, New
ANSELMI Officer since York Life Investment Management LLC (including predecessor
10/19/46 2004 advisory organizations) (since 2000); Secretary (since 2001)
and General Counsel (since 2004), New York Life Investment
Management Holdings LLC; Senior Vice President, New York
Life Insurance Company (since 2000); Vice President and
Secretary, McMorgan & Company LLC (since 2001); Secretary,
NYLIM Service Company LLC (since 2005), NYLCAP Manager LLC
(since 2004), Madison Capital Funding LLC (since 2002), and
Institutional Capital LLC (since 2006); Chief Legal Officer,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), McMorgan Funds (since 2005) and
ICAP Funds, Inc. (since 2006); Managing Director and Senior
Counsel, Lehman Brothers Inc. (1998 to 1999); General
Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998)
-------------------------------------------------------------------------------------------------
JACK R. Treasurer and Managing Director, New York Life Investment Management LLC
BENINTENDE Principal (since June 2007); Treasurer and Principal Financial and
5/12/64 Financial and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
Accounting MainStay VP Series Fund, Inc., and ICAP Funds, Inc. (since
Officer since June 2007); Vice President, Prudential Investments (2000 to
June 2007 2007); Assistant Treasurer, JennisonDryden Family of Funds,
Target Portfolio Trust, The Prudential Series Fund and
American Skandia Trust (2006 to 2007); Treasurer and
Principal Financial Officer, The Greater China Fund (2007)
-------------------------------------------------------------------------------------------------
STEPHEN P. President since Senior Managing Director and Chief Marketing Officer, New
FISHER March 2007 York Life Investment Management LLC (since 2005); Managing
2/22/59 Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since March 2007); Managing Director, UBS
Global Asset Management (1999 to 2003)
-------------------------------------------------------------------------------------------------
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration predecessor advisory organizations) (since 2000); Executive
2/8/59 since 2005 Vice President, New York Life Trust Company (since 2006);
Vice President--Administration, Eclipse Funds, Eclipse Funds
Inc. and MainStay VP Series Fund, Inc. (since 2005) and ICAP
Funds, Inc. (since 2006)
-------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 35
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Senior Managing Director and Chief Compliance Officer (since
MICUCCI President and 2006) and Managing Director and Chief Compliance Officer
12/16/65 Chief Compliance (2003 to 2006), New York Life Investment Management LLC and
Officer since New York Life Investment Management Holdings LLC; Senior
2006 Managing Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE Distributors
LLC; Chief Compliance Officer, NYLCAP Manager LLC (since
2006); Senior Vice President and Chief Compliance Officer,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund,
Inc., and ICAP Funds, Inc. (since 2006); Vice President--
Compliance, Eclipse Funds, Eclipse Funds Inc. and MainStay
VP Series Fund, Inc. (2004 to 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002)
-------------------------------------------------------------------------------------------------
MARGUERITE E.H. Secretary since Managing Director and Associate General Counsel, New York
MORRISON* 2004 Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC (since
2005); Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP Funds,
Inc. (since 2006); Chief Legal Officer--Mutual Funds and
Vice President and Corporate Counsel, The Prudential
Insurance Company of America (2000 to 2004)
-------------------------------------------------------------------------------------------------
</Table>
* In addition to serving as Secretary to the Trust, effective January 1, 2008,
Marguerite E.H. Morrison will assume the role of Chief Legal Officer to the
Trust.
Arphiela Arizmendi resigned as Treasurer and Principal Financial and Accounting
Officer of the Trust effective June 7, 2007.
Christopher O. Blunt resigned as President of the Trust effective March 12,
2007.
Alan J. Kirshenbaum resigned as Senior Vice President of the Trust effective
March 19, 2007.
36 MainStay Mid Cap Value Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay 130/30 Core Fund
MainStay 130/30 Growth Fund
MainStay All Cap Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay 130/30 High Yield Fund(2)
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Institutional Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Principal Preservation Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay 130/30 International Fund
MainStay Global High Income Fund
MainStay ICAP International Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
RETIREMENT FUNDS
MainStay Retirement 2010 Fund
MainStay Retirement 2020 Fund
MainStay Retirement 2030 Fund
MainStay Retirement 2040 Fund
MainStay Retirement 2050 Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
New York, New York
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
Chicago, Illinois
MACKAY SHIELDS LLC(3)
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
MCMORGAN & COMPANY LLC(3)
San Francisco, California
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
This page intentionally left blank
(NEW YORK LIFE INVESTMENT MANAGEMENT LLC LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2007 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO11872 (RECYCLE LOGO) MS329-07 MSMV11-12/07
19
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MONEY MARKET FUND
Message from the President
and
Annual Report
October 31, 2007
MESSAGE FROM
THE PRESIDENT
The 12-month period ended October 31, 2007, was a dynamic one for mutual fund
investors. U.S. equity markets generally advanced, with growth stocks out-
performing value stocks at all capitalization levels. Although past performance
is no guarantee of future results, international stocks as a whole provided even
stronger returns for U.S. investors.
The progress of the equity markets, however, was far from steady. In February,
weakness in Asian markets led to sharp price declines around the globe. The
correction caused many investors to reconsider whether China and other emerging
economies could sustain their rapid growth. Fortunately, strong
corporate-earnings reports and positive economic news helped the stock market
regain its footing.
In July and August, difficulties in the subprime-mortgage market led to another
stock-market correction. A number of high-profile mortgage originators either
closed their doors or were sold to larger entities. Other leading financial
services firms faced major write-offs because of subprime-mortgage exposure.
The Federal Open Market Committee (FOMC) took prompt action to increase
liquidity and stabilize the financial markets by lowering the discount rate and
the federal funds target rate during the reporting period. These Federal Reserve
moves helped calm investor concerns, and the stock market generally advanced
from August 16, 2007, the date of an unscheduled FOMC meeting, through the end
of October 2007.
Difficulties in the subprime-mortgage market led to a "flight to quality," or a
general movement toward fixed-income securities that carry lower risk. As demand
for short- and intermediate-term Treasury securities increased, yields fell
across much of the maturity spectrum. Yields rose, however, on 20-and 30-year
Treasury bonds, and the yield curve steepened during the 12-month reporting
period.
High-yield bonds rallied from November 2006 through May 2007. But in June and
July, the yield differences--or spreads--between high-yield bonds and comparable
Treasury securities began to widen. At the end of October 2007, these spreads
were wider than when the reporting period began, making high-yield securities
more attractive to investors willing to accept higher risk.
To help investors address the challenges of today's ever-changing markets, New
York Life Investment Management LLC provides access to seven institutional
investment boutiques, each with its own proprietary research and investment
culture. As advisors and subadvisors to MainStay Funds, these boutiques bring a
wealth of experience and market insight to our shareholders. The portfolio
managers of each MainStay Fund seek to consistently apply time-tested investment
principles across a wide variety of market environments.
The report that follows provides more specific information about the market
forces and investment decisions that affected your investment in MainStay Funds
from November 1, 2006, through October 31, 2007. Please read the report
carefully. As you do, bear in mind that this annual report reflects just a short
segment of your lifetime investment journey. We look forward to continuing to
work with you, wherever that journey may lead.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MONEY MARKET FUND
MainStay Funds
Annual Report
October 31, 2007
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 10
- --------------------------------------------------------------------------------
Financial Statements 13
- --------------------------------------------------------------------------------
Notes to Financial Statements 18
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 22
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 23
- --------------------------------------------------------------------------------
Federal Income Tax Information 25
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 25
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 25
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 25
- --------------------------------------------------------------------------------
Trustees and Officers 26
</Table>
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT
MONTH-END PERFORMANCE INFORMATION, PLEASE CALL 1-800-MAINSTAY (1-800-624-6782)
OR VISIT WWW.MAINSTAYFUNDS.COM.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE FUND.
CLASS A SHARES(1)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
4.69% 2.43% 3.32%
7-DAY CURRENT YIELD: 4.52%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
AVERAGE LIPPER MONEY MARKET
CLASS A FUND
------- ---------------------------
10/31/97 10000.00 10000.00
10508.00 10488.00
10989.00 10946.00
11616.00 11551.00
12130.00 12038.00
12298.00 12184.00
12371.00 12252.00
12438.00 12315.00
12712.00 12571.00
13243.00 13084.00
10/31/07 13865.00 13688.00
</Table>
CLASS B SHARES(1)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
4.69% 2.43% 3.32%
7-DAY CURRENT YIELD: 4.52%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
AVERAGE LIPPER MONEY MARKET
CLASS B FUND
------- ---------------------------
10/31/97 10000.00 10000.00
10508.00 10488.00
10989.00 10946.00
11616.00 11551.00
12130.00 12038.00
12298.00 12184.00
12371.00 12252.00
12438.00 12315.00
12712.00 12571.00
13243.00 13084.00
10/31/07 13865.00 13688.00
</Table>
CLASS C SHARES(1)--NO SALES CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
4.69% 2.43% 3.32%
7-DAY CURRENT YIELD: 4.53%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
AVERAGE LIPPER MONEY MARKET
CLASS C FUND
------- ---------------------------
10/31/97 10000.00 10000.00
10508.00 10488.00
10989.00 10946.00
11616.00 11551.00
12130.00 12038.00
12298.00 12184.00
12371.00 12252.00
12438.00 12315.00
12712.00 12571.00
13243.00 13084.00
10/31/07 13865.00 13688.00
</Table>
Performance tables do not reflect the deduction of taxes that a shareholder
would pay on distributions or Fund-share redemptions. Total returns reflect
change in share price and reinvestment of dividend and capital-gain
distributions. Class A, B and C shares are sold with no initial sales charge or
contingent deferred sales charge (CDSC) and have no annual 12b-1 fees.
Performance figures reflect certain fee waivers and/or expense limitations,
without which total returns may have been lower. These fee waivers and/or
expense limitations are contractual and may be modified or terminated only with
the approval of the Board of Trustees. The Manager may recoup the amount of
certain management fee waivers or expense reimbursements from the Fund pursuant
to the contract if such action does not cause the Fund to exceed existing
expense limitations and the recoupment is made within three years after the year
in which the Manager incurred the expense. Prior to 9/1/98, the performance of
Class C shares includes the historical performance of Class B shares.
THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS AND
SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
Average Lipper money market fund(2) 4.55% 2.30% 3.19%
</Table>
1. As of 10/31/07, MainStay Money Market Fund had an effective 7-day yield of
4.58% for Class A, B and C shares. The 7-day current yield was 4.52%, 4.52%
and 4.53% for Class A, B and C shares, respectively. These yields reflect
certain expense limitations. Had these expense limitations not been in
effect, the effective 7-day would have been 4.43 for Class A, B and C shares
and the 7-day current yield would have been 4.35% for Class A, 4.45% for
Class B and 4.30% for Class C. The fee waivers and/or expense limitations are
contractual and may be modified or terminated only with the approval of the
Board of Directors. The current yield is more reflective of the Fund's
earnings than the total return.
2. Lipper Inc. is an independent monitor of fund performance. Results are based
on total returns with all dividend and capital-gain distributions reinvested.
THE DISCLOSURE ON THE PREVIOUS PAGE IS AN INTEGRAL PART OF THE TABLES AND GRAPHS
AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Money Market Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY MONEY MARKET FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2007, to October 31, 2007,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1,
2007, to October 31, 2007.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six-months ended October 31, 2007. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/07 10/31/07 PERIOD(1) 4/30/07 PERIOD(1)
CLASS A SHARES $1,000.00 $1,023.50 $3.57 $1,021.50 $3.57
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,023.50 $3.57 $1,021.50 $3.57
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,023.50 $3.57 $1,021.50 $3.57
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's net annualized expense ratio of each class
(0.70% for Class A, Class B and Class C) multiplied by the average account
value over the period, divided by 365 and multiplied by 184 (to reflect the
one-half year period).
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2007
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
<Caption>
CASH AND OTHER
ASSETS, LESS
COMMERCIAL PAPER FEDERAL AGENCIES CORPORATE BONDS MEDIUM-TERM NOTES LIABILITIES
- ---------------- ---------------- --------------- ----------------- --------------
69 22.6 6.6 1.6 0.2
</Table>
See Portfolio of Investments on page 10 for specific holdings within these
categories.
8 MainStay Money Market Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Claude Athaide, Ph.D., CFA, of MacKay
Shields LLC
HOW DID MAINSTAY MONEY MARKET FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2007?
As of October 31, 2007, MainStay Money Market Fund Class A and Class B shares
had a 7-day cur-rent yield of 4.52% and Class C shares had a 7-day current yield
of 4.53%. All share classes had a 7-day effective yield of 4.58% as of the same
date. For the 12 months ended October 31, 2007, MainStay Money Market Fund
returned 4.69% for Class A, Class B and Class C shares. All share classes
outperformed the 4.55% return of the average Lipper(1) money market fund for the
12 months ended October 31, 2007.
WHAT FACTORS CONTRIBUTED TO THE FUND'S PERFORMANCE DURING THE REPORTING PERIOD?
Real gross domestic product (GDP) grew 2.85% during the 12 months ended
September 30, 2007. Personal spending increased 2.9%, supported by a 3.8%
increase in real disposable income as nonfarm payrolls increased by 1.57 million
during the period. The trade deficit narrowed, as export growth exceeded import
growth by 8.5%. Residential investment declined by 16.3% during the period.
Major stories during the reporting period included the recession in the housing
market and a major movement toward higher-quality fixed-income securities.
Rising delinquencies among newly underwritten subprime mortgage loans caught
many investors by surprise in late 2006. The delinquencies caused the value of
mortgage securities backed by these loans to fall dramatically. The yield on the
two-year Treasury note fell to 4.51% in early March.
As economic growth picked up in the spring, Treasury yields rose again, with the
yield on the two-year Treasury note reaching 5.1% in June. The rising yield
trend reversed in the middle of June, as news of losses suffered by hedge funds
investing in collateralized debt obligations sparked another round in the
"flight to quality," or the general migration toward lower-risk bonds. Since
June 2007, several other institutions have reported losses on leveraged loans,
subprime mortgages and other structured products.
In August, the Federal Open Market Committee (FOMC) cut the primary discount
rate in an effort to alleviate the increasingly illiquid conditions in the money
markets. In the following weeks, the FOMC continued to take action to encourage
banks to use the discount window to fund assets. These steps were designed to
help banks ease the dislocations in the money markets.
During the last six weeks of the reporting period, the FOMC cut the targeted
federal funds rate by a total of 75 basis points and cut the primary discount
rate a second time. (A basis point is one-hundredth of a percentage point.) The
FOMC stated that its actions were intended to help prevent some of the adverse
effects on the broader economy that might otherwise arise from the disruptions
in the financial markets. Liquidity did improve somewhat during the reporting
period after the FOMC began lowering rates.
After averaging 38 basis points during the first half of 2007, the difference
between three-month Treasury-bill yields and three-month LIBOR(2) rose to 240
basis points in August. The T-bill-to-LIBOR spread is used as a measure of
credit risk. All told, the yield on the three-month Treasury bill fell from
5.08% at the end of October 2006 to 3.94% at the end of October 2007, or a total
of 114 basis points. Three-month LIBOR declined 48 basis points, from 5.37% to
4.89% over the same 12-month period.
HOW DID THE FUND INVEST DURING THE REPORTING PERIOD?
The Fund invested in securities issued by U.S. government sponsored entities and
in first-tier securities issued by finance, insurance, brokerage and industrial
companies, as well as banks and bank holdings companies. The Fund did not own
any commercial paper issued by structured investment vehicles (SIVs).
WHAT WAS THE FUND'S DOLLAR-WEIGHTED AVERAGE MATURITY AT THE END OF THE REPORTING
PERIOD?
As of October 31, 2007, the dollar-weighted average maturity of the Fund was
approximately 63 days.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE FUND.
1. See footnote on page 6 for more information on Lipper Inc.
2. London interbank offered rates (LIBOR) are floating interest rates that are
widely used as reference rates in bank, corporate and government lending
agreements.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecast made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
SHORT-TERM INVESTMENTS (99.8%)+
- -----------------------------------------------------------------------------
COMMERCIAL PAPER (69.0%)
Abbey National North America LLC
4.94%, due 1/2/08 $4,300,000 $ 4,263,417
4.94%, due 1/4/08 2,475,000 2,453,264
4.94%, due 1/9/08 2,450,000 2,426,802
Allianz Finance Corp.
5.06%, due 11/19/07 (a) 5,000,000 4,987,350
5.23%, due 11/8/07 (a) 5,500,000 5,494,407
American Express Credit Corp.
4.66%, due 4/15/08 4,050,000 3,962,975
4.71%, due 1/29/08 3,700,000 3,656,916
4.72%, due 1/17/08 275,000 272,224
5.27%, due 12/27/07 4,000,000 3,967,209
American General Finance Corp.
5.10%, due 1/10/08 3,000,000 2,970,250
5.23%, due 11/20/07 6,000,000 5,983,439
American Honda Finance Corp.
5.25%, due 11/27/07 3,175,000 3,162,961
AstraZeneca
5.25%, due 11/1/07 (a) 2,050,000 2,050,000
5.33%, due 12/5/07 (a) 6,100,000 6,069,293
5.34%, due 12/14/07 (a) 5,500,000 5,464,919
5.54%, due 12/14/07 (a) 4,000,000 3,973,531
Atlantis One Funding Corp.
4.92%, due 1/24/08 (a) 4,000,000 3,954,080
5.19%, due 1/7/08 (a) 4,200,000 4,159,432
Australia & New Zealand Banking
Group, Ltd.
4.54%, due 3/26/08 7,000,000 6,871,114
5.20%, due 12/10/07 3,000,000 2,983,100
Bank of America Corp.
4.69%, due 4/18/08 4,900,000 4,792,117
5.225%, due 11/27/07 5,825,000 5,803,018
Bayerische Landesbank Girozentrale NY
5.11%, due 1/11/08 6,000,000 5,939,532
BNP Paribas Finance, Inc.
5.217%, due 12/12/07 5,350,000 5,318,212
5.497%, due 12/13/07 6,000,000 5,961,521
Dexia Delaware LLC
4.775%, due 11/26/07 3,000,000 2,990,052
Electricite De France
4.78%, due 1/8/08 5,000,000 4,954,856
5.215%, due 1/15/08 4,925,000 4,871,492
General Electric Capital Corp.
5.12%, due 1/14/08 6,000,000 5,936,853
General Electric Co.
5.24%, due 12/21/07 5,000,000 4,963,611
Goldman Sachs Group, Inc.
4.77%, due 2/26/08 5,125,000 5,045,550
5.21%, due 11/13/07 7,250,000 7,237,410
HBOS Treasury Services PLC
5.33%, due 11/8/07 6,225,000 6,218,549
</Table>
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
COMMERCIAL PAPER (CONTINUED)
ING U.S. Funding LLC
5.15%, due 11/6/07 $3,850,000 $ 3,847,245
5.18%, due 11/30/07 5,600,000 5,576,633
5.42%, due 1/8/08 5,050,000 4,998,299
International Business Machines Corp.
5.12%, due 12/19/07 (a) 4,775,000 4,742,403
JPMorgan Chase & Co.
4.85%, due 1/17/08 5,625,000 5,566,648
5.00%, due 12/14/07 3,150,000 3,131,188
KfW International Finance, Inc.
5.13%, due 1/22/08 (a) 5,000,000 4,941,575
5.13%, due 1/24/08 (a) 4,675,000 4,619,041
Lloyds TSB Bank PLC
4.60%, due 11/26/07 7,000,000 6,977,639
Merrill Lynch & Co., Inc.
4.70%, due 1/16/08 5,375,000 5,321,668
4.75%, due 4/30/08 1,300,000 1,268,954
5.22%, due 11/29/07 4,000,000 3,983,760
Metlife Funding, Inc.
4.70%, due 12/7/07 6,000,000 5,971,800
4.75%, due 11/2/07 5,000,000 4,999,340
Morgan Stanley
5.51%, due 1/30/08 2,150,000 2,120,384
5.62%, due 1/3/08 4,000,000 3,960,660
Nationwide Building Society
4.82%, due 4/24/08 (a) 5,000,000 4,882,847
5.03%, due 3/18/08 (a) 5,000,000 4,903,592
Nestle Capital Corp.
4.54%, due 3/10/08 (a) 4,925,000 4,844,257
4.73%, due 1/23/08 (a) 5,000,000 4,945,473
5.20%, due 11/16/07 (a) 5,900,000 5,887,216
Pfizer, Inc.
4.43%, due 4/29/08 (a) 7,575,000 7,407,214
Presidents & Fellows of Harvard College
4.90%, due 12/11/07 5,000,000 4,972,778
5.085%, due 1/22/08 6,000,000 5,930,505
Private Export Funding Corp.
4.73%, due 1/18/08 (a) 6,250,000 6,185,948
5.00%, due 1/17/08 (a) 3,375,000 3,338,906
Prudential Funding LLC
5.17%, due 12/24/07 4,500,000 4,465,749
5.20%, due 11/6/07 4,150,000 4,147,002
Rabobank USA Finance Corp.
4.95%, due 12/17/07 4,700,000 4,670,273
Royal Bank of Scotland
5.175%, due 12/6/07 5,225,000 5,198,711
5.175%, due 12/7/07 5,300,000 5,272,573
</Table>
+ Percentages indicated are based on Fund net assets.
10 MainStay Money Market Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
SHORT-TERM INVESTMENTS (CONTINUED)
- -----------------------------------------------------------------------------
COMMERCIAL PAPER (CONTINUED)
Societe Generale North America, Inc.
5.21%, due 11/13/07 $6,300,000 $ 6,289,059
5.415%, due 11/29/07 375,000 373,421
5.48%, due 12/12/07 3,450,000 3,428,468
5.61%, due 12/10/07 3,250,000 3,230,248
Swedish Export Credit Corp.
5.13%, due 11/7/07 4,800,000 4,795,896
5.22%, due 12/18/07 5,000,000 4,965,925
Swiss RE Financial Products Corp.
5.195%, due 1/25/08 (a) 6,000,000 5,926,404
5.30%, due 1/28/08 (a) 4,600,000 4,540,404
Total Capital S.A.
5.12%, due 11/2/07 (a) 4,500,000 4,499,360
5.135%, due 11/7/07 (a) 4,150,000 4,146,448
5.25%, due 11/15/07 (a) 1,875,000 1,871,172
Toyota Motor Credit Corp.
5.14%, due 11/21/07 4,300,000 4,287,720
5.27%, due 12/4/07 4,550,000 4,528,020
5.30%, due 12/19/07 2,750,000 2,730,567
UBS Finance Delaware LLC
4.92%, due 2/13/08 3,825,000 3,770,634
5.11%, due 1/9/08 5,000,000 4,951,029
5.195%, due 1/9/08 3,725,000 3,687,910
Unilever Capital Corp.
5.25%, due 11/19/07 (a) 3,800,000 3,790,025
5.35%, due 12/12/07 (a) 4,875,000 4,845,296
Wal-Mart Stores, Inc.
4.50%, due 1/29/08 (a) 5,000,000 4,944,375
4.65%, due 1/23/08 (a) 4,425,000 4,377,560
4.72%, due 1/23/08 (a) 2,250,000 2,225,515
------------
386,445,193
------------
CORPORATE BONDS (6.6%)
American Honda Finance Corp.
5.846%, due 9/18/08 (a)(b) 3,800,000 3,800,000
Bank One N.A./Chicago, IL
3.70%, due 1/15/08 5,000,000 4,983,731
General Electric Capital Corp.
5.29%, due 1/3/08 (b) 4,500,000 4,500,776
International Business Machines Corp.
5.132%, due 9/8/08 (a)(b) 5,400,000 5,397,486
Morgan Stanley
5.334%, due 1/18/08 (b) 4,500,000 4,501,488
5.485%, due 11/9/07 (b) 4,500,000 4,500,129
Wachovia Corp.
3.50%, due 8/15/08 4,250,000 4,193,022
Wells Fargo & Co.
4.125%, due 3/10/08 5,000,000 4,979,583
------------
36,856,215
------------
FEDERAL AGENCIES (22.6%)
Federal Home Loan Bank
4.305%, due 3/12/08 3,950,000 3,887,649
4.43%, due 3/19/08 4,125,000 4,054,443
</Table>
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
FEDERAL AGENCIES (CONTINUED)
Federal Home Loan Bank (continued)
4.45%, due 1/10/08 $3,800,000 $ 3,767,119
4.48%, due 3/19/08 675,000 663,324
Federal Home Loan Bank (Discount Notes)
4.755%, due 1/23/08 4,200,000 4,153,956
4.845%, due 1/11/08 6,000,000 5,942,668
4.85%, due 2/15/08 6,500,000 6,407,176
4.89%, due 12/20/07 6,400,000 6,357,402
5.45%, due 8/15/08 5,650,000 5,650,000
Federal Home Loan Mortgage Corporation (Discount
Notes)
4.295%, due 2/29/08 4,450,000 4,386,291
4.72%, due 12/26/07 4,700,000 4,666,108
4.74%, due 12/31/07 4,700,000 4,662,870
4.77%, due 1/7/08 4,600,000 4,559,164
4.85%, due 12/28/07 6,000,000 5,953,925
4.88%, due 12/3/07 2,800,000 2,787,855
5.075%, due 12/11/07 5,850,000 5,817,013
5.09%, due 12/24/07 4,825,000 4,788,843
5.093%, due 12/24/07 1,475,000 1,463,940
5.10%, due 11/5/07 3,925,000 3,922,776
5.11%, due 11/16/07 6,000,000 5,987,225
5.115%, due 11/5/07 4,125,000 4,122,655
5.115%, due 11/26/07 5,000,000 4,982,240
Federal National Mortgage Association (Discount
Notes)
4.54%, due 2/6/08 3,425,000 3,383,103
4.73%, due 1/4/08 4,920,000 4,878,628
4.73%, due 2/13/08 4,337,000 4,277,737
4.80%, due 1/30/08 4,125,000 4,075,500
5.10%, due 11/14/07 6,000,000 5,988,950
5.11%, due 11/28/07 5,000,000 4,980,837
------------
126,569,397
------------
MEDIUM-TERM NOTES (1.6%)
American General Finance Corp.
Series H
4.50%, due 11/15/07 4,500,000 4,498,169
Wachovia Corp.
Series E
5.426%, due 11/8/07 (b) 4,500,000 4,500,083
------------
8,998,252
------------
Total Short-Term Investments
(Amortized Cost $558,869,057) (c) 99.8% 558,869,057
Cash and Other Assets,
Less Liabilities 0.2 1,114,246
---------- ------------
Net Assets 100.0% $559,983,303
========== ============
</Table>
<Table>
(a) May be sold to institutional investors only under Rule 144a
or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(b) Floating rate. Rate shown is the rate in effect at October
31, 2007.
(c) The cost stated also represents the aggregate cost for
federal income tax purposes.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
The table below sets forth the diversification of the Money Market Fund
investments by industry.
INDUSTRY DIVERSIFICATION
<Table>
<Caption>
AMORTIZED
COST PERCENT+
Banks $135,110,336 24.1%
Computers 10,139,889 1.8
Diversified Financial Services 15,107,901 2.7
Electric 9,826,349 1.8
Federal Agencies 126,569,397 22.6
Finance--Auto Loans 18,509,268 3.3
Finance--Consumer Loans 13,451,858 2.4
Finance--Credit Card 11,859,323 2.1
Finance--Investment Banker/Broker 61,060,017 10.9
Finance--Mortgage Loan/Banker 9,786,439 1.7
Finance--Other Services 9,524,854 1.7
Insurance 19,079,559 3.4
Manufacturing 4,963,611 0.9
Oil & Gas 10,516,980 1.9
Pharmaceuticals 24,964,957 4.5
Retail 11,547,450 2.1
Schools 10,903,283 1.9
Special Purpose Entity 55,947,586 10.0
------------ -------------------
558,869,057 99.8
Cash and Other Assets,
Less Liabilities 1,114,246 0.2
------------ -------------------
Net Assets $559,983,303 100.0%
============ ===================
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
</Table>
12 MainStay Money Market Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2007
<Table>
ASSETS:
Investment in securities, at value
(amortized cost $558,869,057) $558,869,057
Cash 15,191
Receivables:
Fund shares sold 2,729,480
Interest 459,505
Other assets 45,667
-------------
Total assets 562,118,900
-------------
LIABILITIES:
Payables:
Fund shares redeemed 1,489,303
Transfer agent (See Note 3) 236,296
Manager (See Note 3) 197,482
Shareholder communication 86,773
Professional fees 27,673
Custodian 6,288
Trustees 6,061
Accrued expenses 4,887
Dividend payable 80,834
-------------
Total liabilities 2,135,597
-------------
Net assets $559,983,303
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized $ 5,600,041
Additional paid-in capital 554,406,996
-------------
560,007,037
Accumulated distributions in excess of net
investment income (23,482)
Accumulated net realized loss on investments (252)
-------------
Net assets $559,983,303
=============
CLASS A
Net assets applicable to outstanding shares $346,959,996
=============
Shares of beneficial interest outstanding 346,980,277
=============
Net asset value per share outstanding $ 1.00
=============
CLASS B
Net assets applicable to outstanding shares $176,753,494
=============
Shares of beneficial interest outstanding 176,753,185
=============
Net asset value and offering price per share
outstanding $ 1.00
=============
CLASS C
Net assets applicable to outstanding shares $ 36,269,813
=============
Shares of beneficial interest outstanding 36,270,613
=============
Net asset value and offering price per share
outstanding $ 1.00
=============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 13
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2007
<Table>
INVESTMENT INCOME:
INCOME:
Interest $27,148,289
------------
EXPENSES:
Manager (See Note 3) 2,458,683
Transfer agent--Classes A, B and C (See Note
3) 1,323,231
Shareholder communication 103,264
Professional fees 102,974
Registration 98,204
Recordkeeping 77,945
Custodian 28,521
Trustees 27,300
Miscellaneous 20,006
------------
Total expenses before waiver 4,240,128
Expense waiver from Manager (See Note 3) (649,067)
------------
Net expenses 3,591,061
------------
Net investment income 23,557,228
------------
REALIZED LOSS ON INVESTMENTS:
Net realized loss on investments (252)
------------
Net increase in net assets resulting from
operations $23,556,976
============
</Table>
14 MainStay Money Market Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2007 AND OCTOBER 31, 2006
<Table>
<Caption>
2007 2006
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 23,557,228 $ 18,727,194
Net realized gain (loss) on
investments (252) 12,032
-----------------------------
Net increase in net assets
resulting from operations 23,556,976 18,739,226
-----------------------------
Dividends to shareholders:
From net investment income:
Class A (13,836,289) (9,523,752)
Class B (8,344,331) (8,410,003)
Class C (1,406,051) (794,462)
-----------------------------
Total dividends to shareholders (23,586,671) (18,728,217)
-----------------------------
Capital share transactions:
Net proceeds from sale of shares 604,775,875 461,720,177
Net asset value of shares issued
to
shareholders in reinvestment of
dividends 22,482,439 17,840,325
Cost of shares redeemed (540,408,611) (478,093,140)
Net asset value of shares
converted
(See Note 1):
Class A 2,051,275 13,802,543
Class B (2,051,275) (13,802,543)
-----------------------------
Increase in net assets derived
from capital share transactions 86,849,703 1,467,362
-----------------------------
Net increase in net assets 86,820,008 1,478,371
NET ASSETS:
Beginning of year 473,163,295 471,684,924
-----------------------------
End of year $ 559,983,303 $ 473,163,295
=============================
Accumulated undistributed
(distributions in excess of) net
investment income at end of year $ (23,482) $ 5,961
=============================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 15
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
---------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- -------- -------- -------- ----------- ------------
Net investment income 0.05 0.04 0.02 0.01 0.00 (a) 0.01
Net realized and unrealized gain on
investments 0.00(a) 0.00(a) 0.00(a) 0.00 (a) -- 0.00 (a)
---------- -------- -------- -------- ----------- ------------
Total from investment operations 0.05 0.04 0.02 0.01 0.00 (a) 0.01
---------- -------- -------- -------- ----------- ------------
Less dividends and distributions:
From net investment income (0.05) (0.04) (0.02) (0.01) (0.00)(a) (0.01)
From net realized gain on investments -- -- -- (0.00)(a) -- (0.00)(a)
---------- -------- -------- -------- ----------- ------------
Total dividends and distributions (0.05) (0.04) (0.02) (0.01) (0.00)(a) (0.01)
---------- -------- -------- -------- ----------- ------------
Net asset value at end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ======== ======== ======== =========== ============
Total investment return 4.69% 4.18% 2.20% 0.54% 0.44%(b) 1.22%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 4.59% 4.14% 2.21% 0.54% 0.53%+ 1.20%
Net expenses 0.70% 0.70% 0.70% 0.70% 0.70%+ 0.70%
Expenses (before waiver) 0.83% 0.93% 0.99% 1.02% 1.01%+ 0.94%
Net assets at end of period (in 000's) $346,960 $260,642 $205,154 $197,310 $173,978 $221,106
</Table>
<Table>
<Caption>
CLASS C
------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ------- ------- ------- ----------- ------------
Net investment income 0.05 0.04 0.02 0.01 0.00 (a) 0.01
Net realized and unrealized gain on
investments 0.00(a) 0.00(a) 0.00(a) 0.00 (a) -- 0.00 (a)
---------- ------- ------- ------- ----------- ------------
Total from investment operations 0.05 0.04 0.02 0.01 0.00 (a) 0.01
---------- ------- ------- ------- ----------- ------------
Less dividends and distributions:
From net investment income (0.05) (0.04) (0.02) (0.01) (0.00)(a) (0.01)
From net realized gain on investments -- -- -- (0.00)(a) -- (0.00)(a)
---------- ------- ------- ------- ----------- ------------
Total dividends and distributions (0.05) (0.04) (0.02) (0.01) (0.00)(a) (0.01)
---------- ------- ------- ------- ----------- ------------
Net asset value at end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ======= ======= ======= =========== ============
Total investment return 4.69% 4.18% 2.20% 0.54% 0.44%(b) 1.22%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 4.59% 4.14% 2.21% 0.54% 0.53%+ 1.20%
Net expenses 0.70% 0.70% 0.70% 0.70% 0.70%+ 0.70%
Expenses (before waiver) 0.83% 0.93% 0.99% 1.02% 1.01%+ 0.94%
Net assets at end of period (in 000's) $36,270 $23,306 $20,426 $31,273 $16,958 $11,207
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
+ Annualized.
(a) Less than one cent per share.
(b) Total return is not annualized.
</Table>
16 MainStay Money Market Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
----------------------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- ----------- ------------
0.05 0.04 0.02 0.01 0.00(a) 0.01
0.00(a) 0.00(a) 0.00(a) 0.00(a) -- 0.00(a)
-------- -------- -------- -------- ----------- ------------
0.05 0.04 0.02 0.01 0.00(a) 0.01
-------- -------- -------- -------- ----------- ------------
(0.05) (0.04) (0.02) (0.01) (0.00)(a) (0.01)
-- -- -- (0.00)(a) -- (0.00)(a)
-------- -------- -------- -------- ----------- ------------
(0.05) (0.04) (0.02) (0.01) (0.00) (0.01)
-------- -------- -------- -------- ----------- ------------
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== =========== ============
4.69% 4.18% 2.20% 0.54% 0.44%(b) 1.22%
4.59% 4.14% 2.21% 0.54% 0.53%+ 1.20%
0.70% 0.70% 0.70% 0.70% 0.70%+ 0.70%
0.83% 0.93% 0.99% 1.02% 1.01%+ 0.94%
$176,753 $189,216 $246,104 $295,963 $354,215 $429,488
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 17
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises nineteen funds (collectively referred to as the
"Funds"). These financial statements and notes relate only to MainStay Money
Market Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Class A shares commenced on
January 3, 1995. Class B shares commenced on May 1, 1986. Class C shares
commenced on September 1, 1998. As approved by the Board of Trustees in 1997,
Class B shares convert to Class A shares eight years after the date they were
purchased. The three classes of shares bear the same voting (except for issues
that relate solely to one class), dividend, liquidation and other rights and
conditions.
The Fund's investment objective is to seek as high a level of current income as
is considered consistent with the preservation of capital and liquidity.
The Fund's principal investments include derivatives such as variable rate
master demand notes, "floating-rate notes" and mortgage-related and asset-backed
securities. If expectations about change in interest rates, or assessments of an
issuer's credit worthiness or market conditions are wrong, the use of
derivatives or other investments could result in a loss.
The Fund invests in foreign securities, which carry certain risks in addition to
the usual risks inherent in domestic instruments. These risks include those
resulting from future adverse political and economic developments and possible
imposition of currency exchange blockages or other foreign governmental laws and
restrictions. The ability of issuers of debt securities held by the Fund to meet
their obligations may be affected by economic developments in a specific
industry or region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) VALUATION OF FUND SHARES. The Fund seeks to maintain a net asset value of
$1.00 per share, although there is no assurance that it will be able to do so on
a continuous basis, and it has adopted certain investment, portfolio and
dividend and distribution policies designed to enable it to do so. An investment
in the Fund is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
(B) SECURITIES VALUATION. Securities are valued at their amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between such cost and the value on maturity date.
(C) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
(D) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund declares dividends of net investment
income daily and are paid monthly and distributions of net realized capital
gains, if any, annually. All dividends and distributions are reinvested in
shares of the Fund, at net asset value, unless the shareholder elects otherwise.
Dividends and distributions to shareholders are determined in accordance with
federal income tax regulations and may differ from generally accepted accounting
principles in the United States of America. Permanent book/tax differences
relating to income and gains are reclassified amongst undistributed net
investment income, accumulated net realized gain or loss and paid-in-capital.
(E) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued daily and discounts and premiums on securities purchased for the Fund
are accreted and amortized, respectively, on the straight line method.
Investment income and realized and unrealized gains and losses on investments
are allocated to separate classes of shares based upon their relative net assets
on the date the income is earned or realized and unrealized gains and losses are
incurred.
(F) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (C) on
page 19) are allocated to separate classes of shares pro rata based upon their
relative net assets value on the date the expenses are incurred. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(G) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported
18 MainStay Money Market Fund
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
(H) INDEMNIFICATIONS. In the normal course of business, the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote.
However, there can be no assurance that material liabilities related to such
obligations will not arise in the future which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager") a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. NYLIM provides offices and conducts clerical, recordkeeping and
bookkeeping services, and is responsible for the financial and accounting
records required to be maintained by the Fund. NYLIM also pays the salaries and
expenses of all personnel affiliated with the Fund and all the operational
expenses that are not the responsibility of the Fund. MacKay Shields LLC (the
"Subadvisor"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life, serves as subadvisor to the Fund and is responsible
for the day-to-day portfolio management of the Fund. Pursuant to the terms of a
Subadvisory Agreement between NYLIM and the Subadvisor, NYLIM pays for the
services of the Subadvisor.
The Fund is contractually obligated to pay NYLIM a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.50% on assets up to $300 million, 0.45% on assets from
$300 million to $700 million, 0.40% on assets from $700 million to $1.0 billion
and 0.35% on assets in excess of $1.0 billion.
Effective March 1, 2007, NYLIM has entered into a written expense limitation
agreement under which it has agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses (total annual operating expenses
excluding taxes, interest, litigation, extraordinary expenses, and brokerage and
other transaction expenses relating to the purchase or sale of portfolio
investments) do not exceed the following amounts of average daily net assets for
each class: Class A, 0.70%; Class B, 0.70% and Class C, 0.70%. This expense
limitation may be modified or terminated only with the approval of the Board of
Trustees. NYLIM may recoup the amount of any management fee waivers or expense
reimbursements from the Fund pursuant to the agreement if such action does not
cause the Fund to exceed existing expense limitations and the recoupment is made
within three years after the year in which NYLIM incurred the expense. For the
year ended October 31, 2007, NYLIM earned fees from the Fund in the amount of
$2,458,683 and waived its fees in the amount of $649,067.
As of October 31, 2007, the amounts of waived fees that are subject to possible
recoupment by NYLIM, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 2010 TOTAL
$232,330 $1,058,259 $649,067 $1,939,656
- ---------------------------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Prior to March 1, 2007, NYLIM had an agreement in place under which it had
agreed to waive a portion of the Fund's management fee or reimburse the expenses
of the Fund so that the Fund's total ordinary operating expenses did not exceed
0.70% of the Fund's average daily net assets for its Class A shares. NYLIM also
applied an equivalent waiver or reimbursement, in an equal amount of basis
points, to the other share classes of the Fund.
State Street Bank & Trust Company ("SSBT"), One Lincoln Street, Boston,
Massachusetts, 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with NYLIM. These services include calculating
daily net asset values of the Fund, maintaining general ledger and sub-ledger
accounts for the calculation of the Fund's respective net asset values, and
assisting NYLIM in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, SSBT is compensated by
NYLIM.
(B) CONTINGENT DEFERRED SALES CHARGE. Although the Fund does not assess a
contingent deferred sales charge upon redemption of Class B or Class C shares of
the Fund, the applicable contingent deferred sales charge will be assessed when
shares were redeemed from the Fund if the shareholder previously exchanged his
or her investment into the Fund from another Fund in the Trust. The Fund was
advised that NYLIFE Distributors LLC (the "Distributor"), an indirect wholly
owned subsidiary of New York Life, received from shareholders the proceeds from
contingent deferred sales charges for the year ended October 31, 2007, in the
amount of $295,055.
(C) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing
www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
agent. NYLIM Service has entered into an agreement with Boston Financial Data
Services pursuant to which it performs certain services for which NYLIM Service
is responsible. Transfer agent expenses incurred by the Fund, for the year ended
October 31, 2007, amounted to $1,323,231.
(D) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts, effective March 1, 2007. Shareholders with an account
balance of less than $1,000 are charged an annual per account fee of $20
(assessed semi-annually).
(E) CAPITAL. At October 31, 2007, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $592 0.0*%
- --------------------------------------------------------------------
Class C 114 0.0*
- --------------------------------------------------------------------
</Table>
* Less than one-tenth of a percent.
(F) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2007, these fees, which are included in professional fees
shown on the Statement of Operations, were $18,933.
The Fund pays the Manager a monthly fee for certain pricing and recordkeeping
services provided under the Accounting Agreement at the annual rate of 1/20 of
1% for the first $20 million of average monthly net assets, 1/30 of 1% of the
next $80 million of average monthly net assets and 1/100 of 1% of any amount in
excess of $100 million of average monthly net assets. Fees for these services
provided to the Fund by the Manager amounted to $77,945 for the year ended
October 31, 2007.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2007, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$57,352 $ (252) $ (80,834) $ -- $ (23,734)
-------------------------------------------------------------------
</Table>
The other temporary differences are primarily due to distribution payable.
At October 31, 2007, for federal income tax purposes, capital loss carryforwards
of $252 were available as shown in the table below, to the extent provided by
the regulations to offset future realized gains of the Fund through the years
indicated. To the extent that these loss carryforwards are used to offset future
capital gains, it is probable that the capital gains so offset will not be
distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2015 $ --(a)
-------------------------------------------
</Table>
(a) Less than one thousand.
The tax character of distributions paid during the years ended October 31, 2007
and October 31, 2006, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2007 2006
Distributions paid from:
Ordinary Income $23,586,671 $18,721,237
Long-Term Capital Gains -- 6,980
- -----------------------------------------------------------
$23,586,671 $18,728,217
- -----------------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
SSBT is the custodian of cash and securities of the Fund. Custodial fees are
charged to the Fund based on the market value of securities in the Fund and the
number of certain cash transactions incurred by the Fund.
NOTE 6--CAPITAL SHARE TRANSACTIONS
(IN 000'S):
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 460,795 $ 460,795
Shares issued to shareholders in
reinvestment of dividends 13,242 13,242
Shares redeemed (389,746) (389,746)
--------------------
Net increase in shares outstanding
before conversion 84,291 84,291
Shares converted from Class B (See Note
1) 2,051 2,051
--------------------
Net increase 86,342 $ 86,342
====================
</Table>
20 MainStay Money Market Fund
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2006:
Shares sold 332,769 $ 332,769
Shares issued to shareholders in
reinvestment of dividends 9,182 9,182
Shares redeemed (300,272) (300,272)
--------------------
Net increase in shares outstanding
before conversion 41,679 41,679
Shares converted from Class B (See Note
1) 13,803 13,803
--------------------
Net increase 55,482 $ 55,482
====================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 79,952 $ 79,952
Shares issued to shareholders in
reinvestment of dividends 7,914 7,914
Shares redeemed (98,273) (98,273)
--------------------
Net decrease in shares outstanding
before conversion (10,407) (10,407)
Shares reacquired upon conversion into
Class A (See Note 1) (2,051) (2,051)
--------------------
Net decrease (12,458) $ (12,458)
====================
Year ended October 31, 2006:
Shares sold 84,374 $ 84,374
Shares issued to shareholders in
reinvestment of dividends 7,931 7,931
Shares redeemed (135,396) (135,396)
--------------------
Net decrease in shares outstanding
before conversion (43,091) (43,091)
Shares reacquired upon conversion into
Class A (See Note 1) (13,803) (13,803)
--------------------
Net decrease (56,894) $ (56,894)
====================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 64,029 $ 64,029
Shares issued to shareholders in
reinvestment of dividends 1,326 1,326
Shares redeemed (52,390) (52,390)
-------------------
Net increase 12,965 $ 12,965
===================
Year ended October 31, 2006:
Shares sold 44,576 $ 44,576
Shares issued to shareholders in
reinvestment of dividends 728 728
Shares redeemed (42,424) (42,424)
-------------------
Net increase 2,880 $ 2,880
===================
</Table>
NOTE 7--OTHER MATTERS:
In 2004 the Securities and Exchange Commission ("SEC") raised concerns relating
to a guarantee provided to shareholders of the MainStay Equity Index Fund and
the fees and expenses of that Fund, as well as the related guaranteed disclosure
to that fund's shareholders. Discussions have been held with the SEC concerning
a possible resolution of this matter. There can be no assurance at this time as
to the outcome of these efforts.
NOTE 8--NEW ACCOUNTING PRONOUNCEMENTS:
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation becomes effective for the Fund's 2008 fiscal
year, and is to be applied to all open tax years as of the date of
effectiveness. Based on Management's analysis, the determination has been made
that the adoption of the interpretation on November 1, 2007, did not have an
impact on the Fund's financial statements upon adoption. Management continually
reviews the Fund's tax positions and such conclusions under the Interpretation
based on factors, including, but not limited to, ongoing analyses of tax laws,
regulations and interpretations, thereof.
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The changes to current generally accepted accounting
principles from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures
about fair value measurements. As of October 31, 2007, the Fund does not believe
the adoption of SFAS No. 157 will impact the amounts reported in the Fund's
financial statements. However, additional disclosures may be required about the
inputs used to develop the measurements and the effect of certain measurements
reported in the financial statements for a fiscal period.
www.mainstayfunds.com 21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Money Market Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2007, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years or periods in the four-year
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the periods presented through October 31,
2003, were audited by other auditors, whose report dated December 18, 2003,
expressed an unqualified opinion thereon.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2007, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Money Market Fund of The MainStay Funds as of October 31, 2007, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years or periods in the four-year period then ended,
in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 20, 2007
22 MainStay Money Market Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with New York Life Investment Management LLC (the "Manager") and the
Subadvisory Agreement between the Manager and MacKay Shields LLC, a wholly-owned
indirect subsidiary of New York Life Investment Management Holdings LLC, an
affiliate of the Manager, (the "Subadvisor"), (each an "Agreement") at a meeting
held on May 22 and 23, 2007. In connection with the approval of each Agreement,
the Trustees reviewed a significant amount of a wide variety of information that
they had requested and received from the Manager and the Subadvisor, and data
and analysis from an outside data provider and a third party consultant. The
Trustees considered various industry trends and regulatory developments in their
deliberations. In considering approval of each Agreement, and in evaluating the
fairness of the compensation to be paid by the Fund, the Trustees met both as a
full Board and in executive session with no Interested Trustee present, in
advance of the meeting at which the Agreements were approved, and they
considered a number of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor, including that the Fund is a money
market fund. The Trustees reviewed the services that the Manager and the
Subadvisor have provided historically to the Fund, and also generally to other
series of the Trust. Among other services, the Manager's services have included
investment management services, including monitoring and evaluating the
Subadvisor's investment program and investment results with respect to the Fund,
and the Subadvisor's compliance with the Fund's investment policies and
restrictions, and administrative services, including working with other service
providers of the Trust, maintaining certain Fund records, providing office
space, performing clerical and bookkeeping services for the Fund, preparing
Board materials and Fund filings, and otherwise managing the Trust's operations.
The Subadvisor is responsible for the day-to-day portfolio management of the
Fund, including determining the composition of assets of the Fund and the timing
of the Fund's execution of the purchase and sale of assets, and its other
services include, among other services, providing reports to the Manager and
reviewing certain aspects of Fund filings. The Trustees considered, among other
things, the Manager's and Subadvisor's management, personnel, resources,
operations and portfolio management capabilities. The Board reviewed reports on
the Subadvisor's brokerage practices, including with respect to best execution
of portfolio trades. The Trustees considered the Manager's supervision of the
Fund's service providers and its attention to the compliance program of the
Trust, the Manager, the Subadvisor and certain other service providers, as well
as the Subadvisor's attention to its compliance program. The Trustees noted the
generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's investment performance
that was slightly below peer median over various periods of time and the
sensitivity to expenses of the comparative performance of the Fund.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information that indicated that the profitability to the Manager and its
affiliates from the Management Agreement, and from the overall relationship with
the Trust, was low. The Trustees considered other benefits that the Manager and
its affiliates receive from the relationship with the Trust, including benefits
that NYLIFE Distributors and MainStay Shareholder Services receive in exchange
for services they provide to the Funds, and certain benefits from soft dollar
arrangements. The Trustees acknowledged certain benefits to the reputation of
the Manager and the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They considered that, across the Trust
(though not every series or share class), gross transfer agency fees tended to
be relatively high and, therefore, adversely affected gross expense ratios.
Noting that the Trust historically permitted smaller investor accounts, the
Trustees considered measures that had been recently implemented that were
intended to increase the average size of shareholder accounts, including
generally higher investment minimums, and small account fees, and the Trustees
considered potential benefits to the Manager and its affiliates arising from
such measures.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the Manager's willingness to implement
contractual
www.mainstayfunds.com 23
breakpoints that would reduce the Fund's management fee at asset levels above
the breakpoints, and the fact that the breakpoints were intended to provide that
shareholders would share in benefits from economies of scale obtained through
the growth in the Fund's assets. The Trustees noted that the Fund's management
fee rate had been reduced by the breakpoint schedule applicable to the Fund. The
Trustees reviewed information about the potential effect of asset growth on Fund
expenses, the difficulty of forecasting its effect on the profitability of the
Manager and its affiliates, and the management fee breakpoints applicable to the
Fund and certain other funds. It was noted that, to the extent the Fund's gross
expenses currently were higher than its net expenses, the reduction of the
Fund's gross expenses through the achievement of economies of scale might
benefit the Manager by reducing the expenses the Manager must reimburse to the
Fund rather than directly benefiting the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by the
Fund, the Trustees evaluated factors such as the fees and expenses borne by
other registered funds in the market pursuing strategies generally similar to
the Fund's. The Trustees considered certain comparative data with respect to
other registered money market fund clients of the Manager and Subadvisor, and
took account of explanations and other information relating to the fees and
expenses of those other funds and accounts. The Trustees considered the current
and proposed contractual and net management fees, its anticipated gross and net
expense ratio, and various components of the expense ratio, in comparison to
other funds in comparison groupings. The Trustees generally acknowledged the
historical relationships among the Manager, the Subadvisor and the Trust and the
likely difficulties in implementing an alternative to the investment management
arrangement between the Trust and the Manager. The Trustees took account of the
Manager's willingness to maintain the management fee waiver and expense
limitation applicable to the Fund.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings, with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. This summary set out
above describes the most important, but not all, of the factors considered by
the Trustees in considering each Agreement. On the basis of their review, a
majority of the Trustees and a majority of the Non-Interested Trustees concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the judgment of a
majority of the Trustees and a majority of the Non-Interested Trustees that
approval of each Agreement was in the best interests of the Fund and its
shareholders.
24 MainStay Money Market Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2007,
should be multiplied by 98.4% to arrive at the amount eligible for qualified
interest income.
In January 2008, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2007. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2007.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
or (iii) on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 1-800-MAINSTAY (1-800-624-6782). You also can obtain and review copies
of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC
(information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330.
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of The MainStay Funds (the
"Trust") was held on May 4, 2007, at the offices of New York Life Investment
Management LLC in Parsippany, New Jersey. The purpose of the meeting was to
elect the following individuals to the Board of Trustees of the Trust:
- Susan B. Kerley
- Alan R. Latshaw
- Peter Meenan
- Richard H. Nolan, Jr.
- Richard S. Trutanic
- Roman L. Well
- John A. Weisser
- Brian A. Murdock (Interested Trustee)
There are no other Trustees of the Trust.
No other business came before the special meeting. The proposal to elect
Trustees was passed by the shareholders of the Fund as shown below:
<Table>
<Caption>
MONEY
MARKET VOTES VOTES
FUND FOR WITHHELD ABSTENTIONS TOTAL
Susan B. Kerley 174,568,018,174 1,109,940,765 17,160,000 175,695,118,939
- ----------------------------------------------------------------------------------------
Alan R. Latshaw 174,312,585,134 1,366,393,805 17,160,000 175,695,118,939
- ----------------------------------------------------------------------------------------
Peter Meenan 174,081,197,184 1,596,761,755 17,160,000 175,695,118,939
- ----------------------------------------------------------------------------------------
Richard H. Nolan, Jr. 174,509,302,624 1,168,666,315 17,160,000 175,695,118,939
- ----------------------------------------------------------------------------------------
Richard S. Trutanic 174,507,227,964 1,170,730,976 17,160,000 175,695,118,939
- ----------------------------------------------------------------------------------------
Roman L. Well 174,417,232,534 1,260,726,405 17,160,000 175,695,118,939
- ----------------------------------------------------------------------------------------
John A. Weisser 174,576,017,014 1,101,941,925 17,160,000 175,695,118,939
- ----------------------------------------------------------------------------------------
Brian A. Murdock 173,933,776,434 1,744,182,505 17,160,000 175,695,118,939
- ----------------------------------------------------------------------------------------
</Table>
This resulted in approval of the proposal.
www.mainstayfunds.com 25
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Pursuant to
notice, a Special Meeting of Shareholders of the Trust was held on May 4, 2007,
at NYLIM's offices in Parsippany, New Jersey. The Trustees listed below were
elected to serve the Trust effective June 7, 2007.
Each Trustee serves until his or her successor is elected and qualified or until
his or her resignation, death or removal. The Retirement Policy provides that a
Trustee shall tender his or her resignation upon reaching age 72. A Trustee
reaching the age of 72 may continue for additional one-year periods with the
approval of the Board's Nominating and Governance Committee, except that no
Trustee shall serve on the Board past his or her 75th birthday. Officers serve a
term of one year and are elected annually by the Trustees. The business address
of each Trustee and officer listed below is 51 Madison Avenue, New York, New
York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF FUNDS
POSITION(S) HELD IN FUND COMPLEX
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
BRIAN A. MURDOCK Indefinite; Member of the Board of Managers 73 Trustee, Eclipse Funds since
3/14/56 Trustee and Chief and President (since 2004) and June, 2007 (3 funds); Director,
Executive Officer Chief Executive Officer (since Eclipse Funds Inc. since June
since 2006 2006), New York Life Investment 2007 (22 funds); Director,
Management LLC and New York MainStay VP Series Fund, Inc.,
Life Investment Management since 2006 (24 portfolios);
Holdings LLC; Senior Vice Director, ICAP Funds, Inc.,
President, New York Life since 2006 (3 funds)
Insurance Company (since 2004);
Chairman of the Board and
President, NYLIFE Distributors
LLC (since 2004); Member of the
Board of Managers, NYLCAP
Manager LLC and Madison Capital
Funding LLC (since 2004),
MacKay Shields LLC and
Institutional Capital LLC
(since 2006), and McMorgan &
Company LLC (since 2007); Chief
Executive Officer, Eclipse
Funds and Eclipse Funds Inc.
(since 2006); Chairman (2006 to
2007) and Director and Chief
Executive Officer (since 2006),
MainStay VP Series Fund, Inc.;
Director and Chief Executive
Officer, ICAP Funds, Inc.
(since 2006); Chief Investment
Officer, MLIM Europe and Asia
(2001 to 2003); President of
Merrill Japan and Chairman of
MLIM's Pacific Region (1999 to
2001)
-----------------------------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow Capital
Management, Inc., McMorgan & Company LLC, NYLIFE Securities Inc. and/or NYLIFE
Distributors LLC, as described in detail above in the column "Principal
Occupation(s) During Past Five Years."
26 MainStay Money Market Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. KERLEY Indefinite; Partner, Strategic Management 73 Chairman since 2005 and Trustee
8/12/51 Chairman and Advisors LLC (since 1990) since 2000, Eclipse Funds (3
Trustee since funds); Chairman since 2005 and
June 2007 Director since 1990, Eclipse
Funds Inc. (22 funds); Chairman
and Director, ICAP Funds, Inc.,
since 2006 (3 funds); Chairman
and Director, MainStay VP
Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
Legg Mason Partners Funds,
Inc., since 1991 (30
portfolios)
----------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & Young 73 Trustee, Eclipse Funds since
3/27/51 Trustee and Audit LLP (2002 to 2003); Partner, June 2007 (3 funds); Director,
Committee Arthur Andersen LLP (1989 to Eclipse Funds Inc. since June
Financial Expert 2002); Consultant to the Audit 2007 (22 funds); Director, ICAP
since 2006 and Compliance Committee of The Funds, Inc., since June 2007 (3
MainStay Funds (2004 funds); Director, MainStay VP
to 2006) Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
State Farm Associates Funds
Trusts since 2005 (3
portfolios); Trustee, State
Farm Mutual Fund Trust since
2005 (15 portfolios); Trustee,
State Farm Variable Product
Trust since 2005 (9 portfolios)
----------------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds since
12/5/41 Trustee since President and Chief Executive 2002 (3 funds); Director,
June 2007 Officer, Babson-United, Inc. Eclipse Funds Inc. since 2002
(financial services firm) (2000 (22 funds); Director, ICAP
to 2004); Independent Funds, Inc.,
Consultant (1999 to 2000); Head since 2006 (3 funds); Director,
of Global Funds, Citicorp (1995 MainStay VP Series Fund, Inc.,
to 1999) since June 2007 (24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 73 Trustee, Eclipse Funds since
NOLAN, JR. Trustee since Management; President--Shields/ June 2007 (3 funds); Director,
11/16/46 June 2007 Alliance, Alliance Capital Eclipse Funds Inc. since June
Management (1994 to 2004) 2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 2006
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman (since 1990) and Chief 73 Trustee, Eclipse Funds since
TRUTANIC Trustee since Executive Officer (1990 to June 2007 (3 funds); Director,
2/13/52 1994 1999), Somerset Group Eclipse Funds Inc. since June
(financial advisory firm); 2007 (22 funds); Director, ICAP
Managing Director and Advisor, Funds, Inc., since June 2007 (3
The Carlyle Group (private funds); Director, MainStay VP
investment firm) (2002 to Series Fund, Inc., since June
2004); Senior Managing Director 2007 (24 portfolios)
and Partner, Groupe Arnault
S.A. (private investment firm)
(1999
to 2002)
----------------------------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 27
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEE
ROMAN L. WEIL Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds since
5/22/40 Trustee and Audit Accounting, Graduate School of June 2007 (3 funds); Director,
Committee Business, University of Eclipse Funds Inc. since June
Financial Expert Chicago; President, Roman L. 2007 (22 funds); Director, ICAP
since June 2007 Weil Associates, Inc. Funds, Inc., since June 2007 (3
(consulting firm) funds); Director, MainStay VP
Series Fund, Inc., since 1994
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 73 Trustee, Eclipse Funds since
10/22/41 Trustee since Salomon Brothers, Inc. (1971 to June 2007 (3 funds); Director,
June 2007 1995) Eclipse Funds Inc. since June
2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 1997
(24 portfolios); Trustee,
Direxion Funds (69 funds) and
Direxion Insurance Trust (45
funds) since March 2007
----------------------------------------------------------------------------------------------------------------------
</Table>
Terry L. Lierman resigned as Trustee of the Trust effective May 31, 2007. Edward
J. Hogan, John B. McGuckian and Donald E. Nickelson resigned as Trustees of the
Trust effective June 7, 2007.
At a meeting of the Board of Trustees held on June 7 and 8, 2007, the following
individuals were appointed to serve as Officers of the Trust effective June 7,
2007:
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ROBERT A. Chief Legal Senior Managing Director, General Counsel and Secretary, New
ANSELMI Officer since York Life Investment Management LLC (including predecessor
10/19/46 2004 advisory organizations) (since 2000); Secretary (since 2001)
and General Counsel (since 2004), New York Life Investment
Management Holdings LLC; Senior Vice President, New York
Life Insurance Company (since 2000); Vice President and
Secretary, McMorgan & Company LLC (since 2001); Secretary,
NYLIM Service Company LLC (since 2005), NYLCAP Manager LLC
(since 2004), Madison Capital Funding LLC (since 2002), and
Institutional Capital LLC (since 2006); Chief Legal Officer,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), McMorgan Funds (since 2005) and
ICAP Funds, Inc. (since 2006); Managing Director and Senior
Counsel, Lehman Brothers Inc. (1998 to 1999); General
Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998)
-------------------------------------------------------------------------------------------------
JACK R. Treasurer and Managing Director, New York Life Investment Management LLC
BENINTENDE Principal (since June 2007); Treasurer and Principal Financial and
5/12/64 Financial and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
Accounting MainStay VP Series Fund, Inc., and ICAP Funds, Inc. (since
Officer since June 2007); Vice President, Prudential Investments (2000 to
June 2007 2007); Assistant Treasurer, JennisonDryden Family of Funds,
Target Portfolio Trust, The Prudential Series Fund and
American
Skandia Trust (2006 to 2007); Treasurer and Principal
Financial Officer, The Greater China
Fund (2007)
-------------------------------------------------------------------------------------------------
STEPHEN P. President since Senior Managing Director and Chief Marketing Officer, New
FISHER March 2007 York Life Investment Management LLC (since 2005); Managing
2/22/59 Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since March 2007); Managing Director, UBS
Global Asset Management (1999 to 2003)
-------------------------------------------------------------------------------------------------
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration predecessor advisory organizations) (since 2000); Executive
2/8/59 since 2005 Vice President, New York Life Trust Company (since 2006);
Vice President--Administration, Eclipse Funds, Eclipse Funds
Inc. and MainStay VP Series Fund, Inc. (since 2005) and ICAP
Funds, Inc. (since 2006)
-------------------------------------------------------------------------------------------------
</Table>
28 MainStay Money Market Fund
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Senior Managing Director and Chief Compliance Officer (since
MICUCCI President and 2006) and Managing Director and Chief Compliance Officer
12/16/65 Chief Compliance (2003 to 2006), New York Life Investment Management LLC and
Officer since New York Life Investment Management Holdings LLC; Senior
2006 Managing Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE Distributors
LLC; Chief Compliance Officer, NYLCAP Manager LLC (since
2006); Senior Vice President and Chief Compliance Officer,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund,
Inc., and ICAP Funds, Inc. (since 2006); Vice President--
Compliance, Eclipse Funds, Eclipse Funds Inc. and MainStay
VP Series Fund, Inc. (2004 to 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002)
-------------------------------------------------------------------------------------------------
MARGUERITE E.H. Secretary since Managing Director and Associate General Counsel, New York
MORRISON* 2004 Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC (since
2005); Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP Funds,
Inc. (since 2006); Chief Legal Officer--Mutual Funds and
Vice President and Corporate Counsel, The Prudential
Insurance Company of America (2000 to 2004)
-------------------------------------------------------------------------------------------------
</Table>
* In addition to serving as Secretary to the Trust, effective January 1, 2008,
Marguerite E.H. Morrison will assume the role of Chief Legal Officer to the
Trust.
Arphiela Arizmendi resigned as Treasurer and Principal Financial and Accounting
Officer of the Trust effective June 7, 2007.
Christopher O. Blunt resigned as President of the Trust effective March 12,
2007.
Alan J. Kirshenbaum resigned as Senior Vice President of the Trust effective
March 19, 2007.
www.mainstayfunds.com 29
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay 130/30 Core Fund
MainStay 130/30 Growth Fund
MainStay All Cap Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay 130/30 High Yield Fund(2)
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Institutional Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Principal Preservation Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay 130/30 International Fund
MainStay Global High Income Fund
MainStay ICAP International Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
RETIREMENT FUNDS
MainStay Retirement 2010 Fund
MainStay Retirement 2020 Fund
MainStay Retirement 2030 Fund
MainStay Retirement 2040 Fund
MainStay Retirement 2050 Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
New York, New York
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
Chicago, Illinois
MACKAY SHIELDS LLC(3)
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
MCMORGAN & COMPANY LLC(3)
San Francisco, California
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
(NEW YORK LIFE INVESTMENT MANAGEMENT LLC LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2007 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO11872 (RECYCLE LOGO) MS329-07 MSMM11-12/07
12
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
SMALL CAP GROWTH FUND
Message from the President
and
Annual Report
October 31, 2007
MESSAGE FROM
THE PRESIDENT
The 12-month period ended October 31, 2007, was a dynamic one for mutual fund
investors. U.S. equity markets generally advanced, with growth stocks out-
performing value stocks at all capitalization levels. Although past performance
is no guarantee of future results, international stocks as a whole provided even
stronger returns for U.S. investors.
The progress of the equity markets, however, was far from steady. In February,
weakness in Asian markets led to sharp price declines around the globe. The
correction caused many investors to reconsider whether China and other emerging
economies could sustain their rapid growth. Fortunately, strong
corporate-earnings reports and positive economic news helped the stock market
regain its footing.
In July and August, difficulties in the subprime-mortgage market led to another
stock-market correction. A number of high-profile mortgage originators either
closed their doors or were sold to larger entities. Other leading financial
services firms faced major write-offs because of subprime-mortgage exposure.
The Federal Open Market Committee (FOMC) took prompt action to increase
liquidity and stabilize the financial markets by lowering the discount rate and
the federal funds target rate during the reporting period. These Federal Reserve
moves helped calm investor concerns, and the stock market generally advanced
from August 16, 2007, the date of an unscheduled FOMC meeting, through the end
of October 2007.
Difficulties in the subprime-mortgage market led to a "flight to quality," or a
general movement toward fixed-income securities that carry lower risk. As demand
for short- and intermediate-term Treasury securities increased, yields fell
across much of the maturity spectrum. Yields rose, however, on 20-and 30-year
Treasury bonds, and the yield curve steepened during the 12-month reporting
period.
High-yield bonds rallied from November 2006 through May 2007. But in June and
July, the yield differences--or spreads--between high-yield bonds and comparable
Treasury securities began to widen. At the end of October 2007, these spreads
were wider than when the reporting period began, making high-yield securities
more attractive to investors willing to accept higher risk.
To help investors address the challenges of today's ever-changing markets, New
York Life Investment Management LLC provides access to seven institutional
investment boutiques, each with its own proprietary research and investment
culture. As advisors and subadvisors to MainStay Funds, these boutiques bring a
wealth of experience and market insight to our shareholders. The portfolio
managers of each MainStay Fund seek to consistently apply time-tested investment
principles across a wide variety of market environments.
The report that follows provides more specific information about the market
forces and investment decisions that affected your investment in MainStay Funds
from November 1, 2006, through October 31, 2007. Please read the report
carefully. As you do, bear in mind that this annual report reflects just a short
segment of your lifetime investment journey. We look forward to continuing to
work with you, wherever that journey may lead.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
SMALL CAP GROWTH FUND
MainStay Funds
Annual Report
October 31, 2007
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 14
- --------------------------------------------------------------------------------
Notes to Financial Statements 20
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 26
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 27
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 29
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 29
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 29
- --------------------------------------------------------------------------------
Trustees and Officers 30
</Table>
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT
MONTH-END PERFORMANCE INFORMATION, PLEASE CALL 1-800-MAINSTAY (1-800-624-6782)
OR VISIT WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges -0.27% 10.21% 5.58%
Excluding sales charges 5.53 11.46 6.22
</Table>
PERFORMANCE GRAPH (With sales charges)
<Table>
<Caption>
MAINSTAY SMALL CAP GROWTH
FUND RUSSELL 2000 GROWTH INDEX
------------------------- -------------------------
6/1/98 9450 10000
8703 8252
15252 10669
19514 12393
11698 8489
9699 6658
12938 9758
13102 10298
14361 11421
15812 13370
10/31/07 16687 15607
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges -0.27% 10.35% 5.41%
Excluding sales charges 4.73 10.62 5.41
</Table>
(With sales charges)
<Table>
<Caption>
MAINSTAY SMALL CAP GROWTH
FUND RUSSELL 2000 GROWTH INDEX
------------------------- -------------------------
6/1/98 10000 10000
9180 8252
15960 10669
20260 12393
12048 8489
9921 6658
13126 9758
13198 10298
14358 11421
15690 13370
10/31/07 16433 15607
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
With sales charges 3.80% 10.63% 5.42%
Excluding sales charges 4.80 10.63 5.42
</Table>
(With sales charges)
<Table>
<Caption>
MAINSTAY SMALL CAP GROWTH
FUND RUSSELL 2000 GROWTH INDEX
------------------------- -------------------------
6/1/98 10000 10000
9180 8252
15960 10669
20260 12393
12048 8489
9921 6658
13126 9758
13198 10298
14358 11421
15690 13370
10/31/07 16443 15607
</Table>
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect maximum applicable sales charges explained in this paragraph, change in
share price, and reinvestment of dividend and capital-gain distributions. The
graphs assume an initial investment of $10,000 and reflect the deduction of all
sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase and have an annual 12b-1 fee of 1.00%.
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee and are generally available to corporate and institutional investors
with a minimum initial
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
6.18% 11.87% 6.55%
</Table>
PERFORMANCE GRAPH (With sales charges)
<Table>
<Caption>
MAINSTAY SMALL CAP GROWTH
FUND RUSSELL 2000 GROWTH INDEX
------------------------- -------------------------
6/1/98 10000 10000
9220 8252
16197 10669
20775 12393
12486 8489
10378 6658
13878 9758
14089 10298
15482 11421
17123 13370
10/31/07 18181 15607
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
- -----------------------------------------------------------------------------------
Russell 2000(R) Growth Index(1) 16.73% 18.57% 4.84%
Average Lipper small-cap growth fund(2) 20.33 17.26 8.24
</Table>
investment of $5 million. Performance figures reflect certain fee waivers and/or
expense limitations, without which total returns may have been lower. These fee
waivers and/or expense limitations are contractual and may be modified or
terminated only with the approval of the Board of Trustees. The Manager may
recoup the amount of certain management fee waivers or expense reimbursements
from the Fund pursuant to the contract if such action does not cause the Fund to
exceed existing expense limitations and the recoupment is made within three
years after the year in which the Manager incurred the expense. From inception
(6/1/98) through 8/31/98, performance for Class C shares (first offered 9/1/98)
includes the historical performance of Class B shares adjusted to reflect the
applicable CDSC, fees, estimated expenses and fee waivers/expense limitations of
Class C shares upon initial offer. From inception through 5/30/06, performance
of Class I shares (first offered 5/31/06) includes the historical performance of
Class A shares adjusted to reflect the applicable sales charge (or CDSC), fees,
estimated expenses, and fee waivers/expense limitations of Class I shares upon
initial offer. Unadjusted, the performance shown for these newer classes might
have been lower.
1. The Russell 2000(R) Growth Index is an unmanaged index that measures the
performance of those Russell 2000(R) companies with higher price-to-book
ratios and higher forecasted growth values. The Russell 2000(R) Index is an
unmanaged index that measures the performance of the 2,000 smallest companies
in the Russell 3000(R) Index, which, in turn, is an unmanaged index that
measures the performance of the 3,000 largest U.S. companies based on total
market capitalization. Results assume the reinvestment of all income and
capital gains. The Russell 2000(R) Growth Index is considered to be the
Fund's broad-based securities-market index for comparison purposes. An
investment cannot be made directly in an index.
2. Lipper Inc. is an independent monitor of fund performance. Results are based
on total returns with all dividend and capital-gain distributions reinvested.
THE DISCLOSURE ON THE PRECEDING PAGE IS AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Small Cap Growth Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2007, to October 31, 2007,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1,
2007, to October 31, 2007.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six-months ended October 31, 2007. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/07 10/31/07 PERIOD(1) 10/31/07 PERIOD(1)
CLASS A SHARES $1,000.00 $ 995.40 $ 7.44 $1,017.60 $ 7.53
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $ 991.45 $11.19 $1,013.85 $11.32
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $ 991.45 $11.19 $1,013.85 $11.32
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $ 998.20 $ 4.53 $1,020.50 $ 4.58
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's net annualized expense ratio of each class
(1.48% for Class A, 2.23% for Class B and Class C, and 0.90% for Class I)
multiplied by the average account value over the period, divided by 365 and
multiplied by 184 (to reflect the one-half year period).
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2007
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 97.8
Short-Term Investments (collateral from securities lending 30.7
is 29.8%)
Liabilities in Excess of Cash and Other Assets (28.5)
</Table>
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2007 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Central European Distribution Corp.
2. Tempur-Pedic International, Inc.
3. Dawson Geophysical Co.
4. Layne Christensen Co.
5. PAREXEL International Corp.
6. Hittite Microwave Corp.
7. Warnaco Group, Inc. (The)
8. Triumph Group, Inc.
9. OYO Geospace Corp.
10. Diodes, Inc.
</Table>
8 MainStay Small Cap Growth Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Edmund C. Spelman of MacKay Shields LLC
HOW DID MAINSTAY SMALL CAP GROWTH FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK FOR THE 12-MONTH REPORTING PERIOD?
Excluding all sales charges, MainStay Small Cap Growth Fund returned 5.53% for
Class A shares, 4.73% for Class B shares and 4.80% for Class C shares for the 12
months ended October 31, 2007. Over the same period, Class I shares returned
6.18%. All share classes underperformed the 20.33% return of the average
Lipper(1 )small-cap growth fund and the 16.73% return of the Russell 2000(R)
Growth Index(2) for the 12 months ended October 31, 2007. The Russell 2000(R)
Growth Index is the Fund's broad-based securities-market index. See page 5 for
Fund returns with sales charges.
WHICH SECTORS HAD THE GREATEST POSITIVE OR NEGATIVE IMPACT ON THE FUND'S
RELATIVE PERFORMANCE DURING THE REPORTING PERIOD?
Favorable stock selection in the energy and consumer staples sectors helped the
Fund's performance during the 12 months ended October 31, 2007. An overweight
position in the energy sector also helped the Fund's relative results, as did an
underweight position in consumer discretionary and financial stocks. This,
however, was not enough to overcome poor stock selection in the information
technology, consumer discretionary and industrials sectors. In addition, an
underweight position in materials and an overweight position in the consumer
staples sector detracted from the Fund's relative performance.
WHAT WERE SOME OF THE FUND'S STOCK-SPECIFIC SUCCESS STORIES DURING THE REPORTING
PERIOD?
Dawson Geophysical and OYO Geospace were among the Fund's top performers. Both
companies benefited from strong demand for seismic data services for oil and gas
exploration. Specialty mattress manufacturer Tempur-Pedic International saw
strong earnings growth as it rolled out several new product lines and expanded
its distribution channels. Central European Distribution, a distributor of
alcoholic beverages, saw strong growth in Poland and other European countries
and continued to expand its capacity. Layne Christensen, whose products and
services are used in mineral and energy exploration as well as development of
water resources, benefited from strong demand.
WHICH INDIVIDUAL STOCKS LOST GROUND DURING THE REPORTING PERIOD?
Among the Fund's worst performers were specialty apparel retailers The
Children's Place and Charlotte Russe. Both companies suffered from weak retail
sales and fashion misses. Integrated circuit manufacturer Trident Microsystems
faced competition from lower-priced competitors. Overcapacity and weak demand
hurt regional trucking company Celadon Group, while Palomar Medical Technologies
experienced slower-than-expected demand for its cosmetic laser products.
WERE THERE ANY SIGNIFICANT PURCHASES DURING THE REPORTING PERIOD?
Dawson Geophysical, TempurPedic International, Central European Distribution,
OYO Geospace and Layne Christensen were all new purchases during the reporting
period, and all were strong performers. The Fund also established new positions
in contract research organization PAREXEL International and apparel manufacturer
Warnaco Group. Each of these purchases contributed positively to the Fund's
performance during the reporting period.
WHICH STOCKS DID THE FUND SELL DURING THE REPORTING PERIOD?
We eliminated the Fund's holdings in construction equipment supplier ASV,
biotechnology firm Nektar Therapeutics, specialty retailer Hibbett Sports and
homebuilder Beazer Homes. All of these companies have since experienced
disappointing earnings or unfavorable corporate developments, and the sales
helped the Fund's relative results.
HOW DID THE FUND CHANGE ITS SECTOR WEIGHTINGS DURING THE REPORTING PERIOD?
During the 12 months ended October 31, 2007, we increased the Fund's weightings
in the energy, materials and consumer staples sectors. We decreased the Fund's
weightings in the consumer
The principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a certain rate that is generally higher than the rate
expected for nongrowth companies. If these expectations are not met, the market
price of the stock may decline significantly, even if earnings showed an
absolute increase. Stocks of small companies may be subject to higher price
volatility, significantly lower trading volumes and greater spreads between bid
and ask prices than stocks of larger companies. Small companies may be more
vulnerable to adverse business or market developments than mid- or
large-capitalization companies. The Fund may experience a portfolio turnover
rate of more than 100% and may generate taxable short-term capital gains.
1. See footnote on page 6 for more information on Lipper Inc.
2. See footnote on page 6 for more information on the Russell 2000(R) Growth
Index.
www.mainstayfunds.com 9
discretionary, health care, industrials and financials sectors.
As of October 31, 2007, the Fund was overweight relative to the Russell 2000(R)
Growth Index in the energy, consumer staples and industrials sectors. On the
same date, the Fund was underweight in the health care and consumer
discretionary sectors. The Fund was roughly market weight in the information
technology, materials and financial sectors and had no representation in the
telecommunication services and utilities sectors. On a cumulative basis,
relative sector positioning detracted modestly from the Fund's performance
during the reporting period.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecasts made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
10 MainStay Small Cap Growth Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (97.8%)+
- ------------------------------------------------------------------------------
AEROSPACE & DEFENSE (4.8%)
AAR Corp. (a) 80,300 $ 2,573,614
Ceradyne, Inc. (a)(b) 41,450 2,835,595
V Triumph Group, Inc. (b) 44,700 3,559,014
------------
8,968,223
------------
AIR FREIGHT & LOGISTICS (1.1%)
HUB Group, Inc. Class A (a) 78,300 1,986,471
------------
AIRLINES (1.5%)
Republic Airways Holdings, Inc. (a) 132,500 2,820,925
------------
BEVERAGES (2.3%)
V Central European Distribution Corp. (a)(b) 78,900 4,195,902
------------
CAPITAL MARKETS (2.8%)
Cohen & Steers, Inc. (b) 56,600 2,128,160
optionsXpress Holdings, Inc. (b) 103,300 3,074,208
------------
5,202,368
------------
COMMERCIAL BANKS (0.9%)
Frontier Financial Corp. (b) 77,700 1,724,163
------------
COMMERCIAL SERVICES & SUPPLIES (4.7%)
Interface, Inc. Class A 158,910 3,039,948
Knoll, Inc. 103,300 1,961,667
V Layne Christensen Co. (a) 66,720 3,799,037
------------
8,800,652
------------
COMMUNICATIONS EQUIPMENT (1.7%)
NETGEAR, Inc. (a)(b) 89,200 3,152,328
------------
COMPUTERS & PERIPHERALS (0.6%)
STEC, Inc. (a)(b) 179,400 1,155,336
------------
CONSUMER FINANCE (2.4%)
Cash America International, Inc. 25,100 978,900
EZCORP, Inc. Class A (a) 140,000 1,842,400
World Acceptance Corp. (a)(b) 48,400 1,561,384
------------
4,382,684
------------
DISTRIBUTORS (0.7%)
LKQ Corp. (a) 34,500 1,330,320
------------
ELECTRICAL EQUIPMENT (1.5%)
II-VI, Inc. (a) 81,200 2,820,888
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (4.7%)
Benchmark Electronics, Inc. (a)(b) 96,100 1,971,011
Novatel, Inc. (a) 54,700 2,721,325
</Table>
<Table>
<Caption>
SHARES VALUE
ELECTRONIC EQUIPMENT & INSTRUMENTS (CONTINUED)
Rogers Corp. (a) 38,500 $ 1,887,655
Technitrol, Inc. 76,000 2,235,160
------------
8,815,151
------------
ENERGY EQUIPMENT & SERVICES (14.7%)
Atwood Oceanics, Inc. (a) 37,100 3,125,304
V Dawson Geophysical Co. (a) 49,800 3,974,538
Dril-Quip, Inc. (a) 46,400 2,474,512
Gulf Island Fabrication, Inc. 49,300 1,721,556
Gulfmark Offshore, Inc. (a)(b) 48,600 2,263,788
Hornbeck Offshore Services, Inc. (a)(b) 50,900 1,990,190
Lufkin Industries, Inc. 31,400 1,867,044
NATCO Group, Inc. Class A (a) 57,000 3,038,670
V OYO Geospace Corp. (a) 31,400 3,397,166
TETRA Technologies, Inc. (a) 71,000 1,397,990
W-H Energy Services, Inc. (a)(b) 37,400 2,152,744
------------
27,403,502
------------
FOOD PRODUCTS (1.4%)
Sanderson Farms, Inc. (b) 74,900 2,606,520
------------
HEALTH CARE EQUIPMENT & SUPPLIES (3.1%)
Cutera, Inc. (a)(b) 81,892 2,007,992
Immucor, Inc. (a) 80,150 2,584,838
Palomar Medical Technologies, Inc. (a)(b) 44,800 1,132,992
------------
5,725,822
------------
HEALTH CARE PROVIDERS & SERVICES (4.4%)
Amedisys, Inc. (a)(b) 71,300 3,026,685
AMERIGROUP Corp. (a)(b) 38,700 1,354,500
Bio-Reference Laboratories, Inc. (a)(b) 46,800 1,501,344
Healthspring, Inc. (a) 111,500 2,341,500
------------
8,224,029
------------
HOTELS, RESTAURANTS & LEISURE (1.4%)
Buffalo Wild Wings, Inc. (a)(b) 81,952 2,512,648
------------
HOUSEHOLD DURABLES (2.2%)
V Tempur-Pedic International, Inc. (b) 114,600 4,125,600
------------
INSURANCE (1.2%)
Tower Group, Inc. 73,100 2,206,889
------------
INTERNET SOFTWARE & SERVICES (0.7%)
Travelzoo, Inc. (a)(b) 75,800 1,364,400
------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
IT SERVICES (2.2%)
Ness Technologies, Inc. (a) 159,500 $ 1,866,150
Sykes Enterprises, Inc. (a) 128,900 2,275,085
------------
4,141,235
------------
LIFE SCIENCES TOOLS & SERVICES (2.0%)
V PAREXEL International Corp. (a) 80,800 3,716,800
------------
MACHINERY (1.2%)
Gardner Denver, Inc. (a) 60,700 2,193,091
------------
METALS & MINING (3.0%)
Brush Engineered Materials, Inc. (a) 67,100 3,240,930
RTI International Metals, Inc. (a)(b) 30,000 2,345,400
------------
5,586,330
------------
MULTILINE RETAIL (0.6%)
Bon-Ton Stores, Inc. (The) (b) 65,600 1,161,120
------------
OIL, GAS & CONSUMABLE FUELS (2.3%)
Mariner Energy, Inc. (a) 92,800 2,320,000
Swift Energy Co. (a) 40,500 1,920,915
------------
4,240,915
------------
PERSONAL PRODUCTS (1.2%)
American Oriental Bioengineering, Inc. (a)(b) 155,900 2,146,743
------------
PHARMACEUTICALS (2.3%)
Par Pharmaceutical Cos., Inc. (a) 97,400 1,796,056
Sciele Pharma, Inc. (a)(b) 94,500 2,404,080
------------
4,200,136
------------
ROAD & RAIL (0.6%)
Celadon Group, Inc. (a) 135,700 1,085,600
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (9.2%)
V Diodes, Inc. (a)(b) 98,975 3,272,114
V Hittite Microwave Corp. (a) 72,500 3,643,125
Skyworks Solutions, Inc. (a) 331,900 3,060,118
Supertex, Inc. (a)(b) 59,600 2,177,784
Tessera Technologies, Inc. (a) 56,300 2,150,097
Trident Microsystems, Inc. (a)(b) 125,100 942,003
Ultra Clean Holdings, Inc. (a) 138,000 1,771,920
------------
17,017,161
------------
SOFTWARE (3.3%)
Macrovision Corp. (a) 80,300 1,927,200
Mentor Graphics Corp. (a) 126,200 2,021,724
Quality Systems, Inc. (b) 59,300 2,148,439
------------
6,097,363
------------
</Table>
<Table>
<Caption>
SHARES VALUE
SPECIALTY RETAIL (6.1%)
Aeropostale, Inc. (a) 110,400 $ 2,528,160
Casual Male Retail Group, Inc. (a)(b) 174,400 1,457,984
Charlotte Russe Holding, Inc. (a) 74,000 1,072,260
Children's Place Retail Stores, Inc. (The) (a) 35,700 913,920
Dress Barn, Inc. (a) 97,300 1,594,747
Gymboree Corp. (The) (a)(b) 59,600 2,028,188
Tween Brands, Inc. (a) 56,800 1,743,760
------------
11,339,019
------------
TEXTILES, APPAREL & LUXURY GOODS (2.7%)
Steven Madden, Ltd. 64,800 1,444,392
V Warnaco Group, Inc. (The) (a) 89,500 3,641,755
------------
5,086,147
------------
TRADING COMPANIES & DISTRIBUTORS (2.3%)
Houston Wire & Cable Co. (b) 108,500 1,906,345
Interline Brands, Inc. (a) 101,000 2,412,890
------------
4,319,235
------------
Total Common Stocks
(Cost $166,601,173) 181,855,716
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (30.7%)
- ------------------------------------------------------------------------------
COMMERCIAL PAPER (0.9%)
Deutsche Bank Financial LLC
4.77%, due 11/1/07 $ 1,630,000 1,630,000
------------
Total Commercial Paper
(Cost $1,630,000) 1,630,000
------------
<Caption>
SHARES
INVESTMENT COMPANY (29.8%)
State Street Navigator Securities Lending Prime
Portfolio (c) 55,403,231 55,403,231
------------
Total Investment Company
(Cost $55,403,231) 55,403,231
------------
Total Short-Term Investments
(Cost $57,033,231) 57,033,231
------------
Total Investments
(Cost $223,634,404) 128.5% 238,888,947(d)
Liabilities in Excess of Cash and Other Assets (28.5) (52,930,408)
----------- ------------
Net Assets 100.0% $185,958,539
=========== ============
</Table>
12 MainStay Small Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
(a) Non-income producing security.
(b) Represents a security, or a portion thereof, which is out on
loan. The aggregate market value of such securities is
$53,262,070; cash collateral of $55,403,231 (included in
liabilities) was received with which the Fund purchased
highly liquid short-term investments.
(c) Represents a security, or a portion thereof, purchased with
cash collateral received for securities on loan.
(d) At October 31, 2007, cost is $223,637,169 for federal income
tax purposes and net unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $33,690,104
Gross unrealized depreciation (18,438,326)
-------------------
Net unrealized appreciation $15,251,778
===================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 13
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2007
<Table>
ASSETS:
Investment in securities, at value
(identified cost $223,634,404) including
$53,262,070 market value of securities
loaned $238,888,947
Cash 15,080
Receivables:
Investment securities sold 3,483,185
Fund shares sold 115,919
Dividends and interest 15,684
Other assets 17,892
-------------
Total assets 242,536,707
-------------
LIABILITIES:
Securities lending collateral 55,403,231
Payables:
Fund shares redeemed 675,729
Transfer agent (See Note 3) 163,371
Manager (See Note 3) 122,677
NYLIFE Distributors (See Note 3) 101,301
Shareholder communication 85,668
Professional fees 16,046
Custodian 4,042
Trustees 2,771
Accrued expenses 3,332
-------------
Total liabilities 56,578,168
-------------
Net assets $185,958,539
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized $ 110,788
Additional paid-in capital 247,795,090
-------------
247,905,878
Accumulated net realized loss on investments (77,201,882)
Net unrealized appreciation on investments 15,254,543
-------------
Net assets $185,958,539
=============
CLASS A
Net assets applicable to outstanding shares $ 96,967,956
=============
Shares of beneficial interest outstanding 5,586,814
=============
Net asset value per share outstanding $ 17.36
Maximum sales charge (5.50% of offering price) 1.01
-------------
Maximum offering price per share outstanding $ 18.37
=============
CLASS B
Net assets applicable to outstanding shares $ 79,864,700
=============
Shares of beneficial interest outstanding 4,945,094
=============
Net asset value and offering price per share
outstanding $ 16.15
=============
CLASS C
Net assets applicable to outstanding shares $ 5,381,761
=============
Shares of beneficial interest outstanding 333,166
=============
Net asset value and offering price per share
outstanding $ 16.15
=============
CLASS I
Net assets applicable to outstanding shares $ 3,744,122
=============
Shares of beneficial interest outstanding 213,764
=============
Net asset value and offering price per share
outstanding $ 17.52
=============
</Table>
14 MainStay Small Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2007
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 477,011
Interest 231,661
Income from securities loaned--net 142,353
------------
Total income 851,025
------------
EXPENSES:
Manager (See Note 3) 2,049,086
Transfer agent--Classes A, B and C (See Note
3) 931,848
Transfer agent--Class I (See Note 3) 4,432
Distribution--Class B (See Note 3) 711,955
Distribution--Class C (See Note 3) 46,923
Distribution/Service--Class A (See Note 3) 251,233
Service--Class B (See Note 3) 237,318
Service--Class C (See Note 3) 15,641
Shareholder communication 96,153
Professional fees 67,151
Registration 59,826
Recordkeeping 47,157
Custodian 19,705
Trustees 12,097
Miscellaneous 16,086
------------
Total expenses before waiver/reimbursement 4,566,611
Expense waiver/reimbursement from Manager
(See Note 3) (793,792)
------------
Net expenses 3,772,819
------------
Net investment loss (2,921,794)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 56,219,488
Net change in unrealized appreciation on
investments (42,496,460)
------------
Net realized and unrealized gain on
investments 13,723,028
------------
Net increase in net assets resulting from
operations $ 10,801,234
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 15
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2007 AND OCTOBER 31, 2006
<Table>
<Caption>
2007 2006
DECREASE IN NET ASSETS:
Operations:
Net investment loss $ (2,921,794) $ (3,630,821)
Net realized gain on investments 56,219,488 18,179,457
Net increase from payments from
Manager for losses attributable
to shareholder trading
arrangements (See Note 3(B) on
page 22.) -- 38,000
Net change in unrealized
appreciation on investments (42,496,460) 7,529,379
---------------------------
Net increase in net assets
resulting from operations 10,801,234 22,116,015
---------------------------
Capital share transactions:
Net proceeds from sale of shares 22,896,401 35,070,303
Cost of shares redeemed (71,949,571) (68,572,985)
Net asset value of shares
converted (See Note 1):
Class A 11,560,555 36,613,954
Class B (11,560,555) (36,613,954)
---------------------------
Decrease in net assets derived
from capital share transactions (49,053,170) (33,502,682)
---------------------------
Net decrease in net assets (38,251,936) (11,386,667)
NET ASSETS:
Beginning of year 224,210,475 235,597,142
---------------------------
End of year $185,958,539 $224,210,475
===========================
</Table>
16 MainStay Small Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
www.mainstayfunds.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
----------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of period $ 16.44 $ 14.94 $ 13.63 $ 13.46 $ 9.88 $ 13.90
------- -------- ------- ------- ----------- ------------
Net investment loss (a) (0.18) (0.18) (0.15) (0.22) (0.18) (0.22)
Net realized and unrealized gain (loss) on
investments 1.10 1.68 (d) 1.46 0.39 3.76 (3.80)
------- -------- ------- ------- ----------- ------------
Total from investment operations 0.92 1.50 1.31 0.17 3.58 (4.02)
------- -------- ------- ------- ----------- ------------
Net asset value at end of period $ 17.36 $ 16.44 $ 14.94 $ 13.63 $ 13.46 $ 9.88
======= ======== ======= ======= =========== ============
Total investment return (b) 5.53% 10.11%(c)(d) 9.61% 1.26% 36.23%(e) (28.92%)
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (1.07%) (1.09%) (1.03%) (1.63%) (1.93%)+ (1.86%)
Net expenses 1.48% 1.48% 1.65% 1.91% 2.12% + 2.07%
Expenses (before waiver/reimbursement) 1.87% 1.94%(c) 1.94% 1.95% 2.12% + 2.07%
Portfolio turnover rate 95% 29% 57% 75% 69% 132%
Net assets at end of period (in 000's) $96,968 $107,078 $68,981 $70,616 $71,451 $44,037
</Table>
<Table>
<Caption>
CLASS C
-----------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of period $15.42 $14.11 $12.97 $12.90 $ 9.54 $13.51
------ ------ ------ ------ ----------- ------------
Net investment loss (a) (0.29) (0.28) (0.25) (0.31) (0.24) (0.30)
Net realized and unrealized gain (loss) on
investments 1.02 1.59(d) 1.39 0.38 3.60 (3.67)
------ ------ ------ ------ ----------- ------------
Total from investment operations 0.73 1.31 1.14 0.07 3.36 (3.97)
------ ------ ------ ------ ----------- ------------
Net asset value at end of period $16.15 $15.42 $14.11 $12.97 $12.90 $ 9.54
====== ====== ====== ====== =========== ============
Total investment return (b) 4.80% 9.28%(c)(d) 8.79% 0.54% 35.22%(e) (29.39%)
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (1.81%) (1.83%) (1.78%) (2.38%) (2.68%)+ (2.61%)
Net expenses 2.23% 2.23% 2.40% 2.66% 2.87% + 2.82%
Expenses (before waiver/reimbursement) 2.62% 2.69%(c) 2.69% 2.70% 2.87% + 2.82%
Portfolio turnover rate 95% 29% 57% 75% 69% 132%
Net assets at end of period (in 000's) $5,382 $6,725 $7,236 $7,396 $7,734 $5,248
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges.
(c) Includes nonrecurring reimbursements from Manager for professional fees. The effect on
total return was less than one hundredth of a percent.
(d) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses were less than $0.01 per share
on net realized gains on investments and the effect on total investments return was 0.01%,
respectively.
(e) Total return is not annualized.
</Table>
18 MainStay Small Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
- ----------------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
$ 15.42 $ 14.11 $ 12.97 $ 12.90 $ 9.54 $ 13.51
------- -------- -------- -------- ---------------- ------------
(0.29) (0.28) (0.25) (0.31) (0.24) (0.30)
1.02 1.59(d) 1.39 0.38 3.60 (3.67)
------- -------- -------- -------- ---------------- ------------
0.73 1.31 1.14 0.07 3.36 (3.97)
------- -------- -------- -------- ---------------- ------------
$ 16.15 $ 15.42 $ 14.11 $ 12.97 $ 12.90 $ 9.54
======= ======== ======== ======== ================ ============
4.73% 9.28%(c)(d) 8.79% 0.54% 35.22%(e) (29.39%)
(1.81%) (1.83%) (1.78%) (2.38%) (2.68%)+ (2.61%)
2.23% 2.23% 2.40% 2.66% 2.87% + 2.82%
2.62% 2.69%(c) 2.69% 2.70% 2.87% + 2.82%
95% 29% 57% 75% 69% 132%
$79,865 $109,872 $159,380 $172,478 $178,730 $131,404
</Table>
<Table>
<Caption>
CLASS I
- -------------------------------------
MAY 31,
2006**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
2007 2006
$16.50 $16.60
----------- -----------
(0.08) (0.02)
1.10 (0.08) (d)
----------- -----------
1.02 (0.10)
----------- -----------
$17.52 $16.50
=========== ===========
6.18% (0.60%) (c)(d)(e)
(0.48%) (0.32%) +
0.90% 0.77% +
1.30% 1.43% +(c)
95% 29%
$3,744 $ 535
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises nineteen funds (collectively referred to as the
"Funds"). These financial statements and notes relate only to MainStay Small Cap
Growth Fund (the "Fund"), a diversified fund.
The Fund currently offers four classes of shares. Class A shares and Class B
shares commenced on June 1, 1998. Class C shares commenced on September 1, 1998.
Class I shares commenced on May 31, 2006. Class A shares are offered at net
asset value per share plus an initial sales charge. No sales charge applies on
investments of $1 million or more (and certain other qualified purchases) in
Class A shares, but a contingent deferred sales charge is imposed on certain
redemptions of such shares within one year of the date of purchase. Class B
shares and Class C shares are offered without an initial sales charge, although
a declining contingent deferred sales charge may be imposed on redemptions made
within up to six years of purchase of Class B shares and a 1% contingent
deferred sales charge may be imposed on redemptions made within one year of
purchase of Class C shares. Class I shares are not subject to a sales charge. As
approved by the Board of Trustees in 1997, Class B shares convert to Class A
shares eight years after the date they were purchased. The four classes of
shares bear the same voting (except for issues that relate solely to one class),
dividend, liquidation and other rights and conditions except that Class B and
Class C shares are subject to higher distribution fee rates than Class A shares
under a distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I
shares are not subject to a distribution or service fee.
The Fund's investment objective is to seek long term-capital appreciation by
investing primarily in securities of small-capitalization companies.
Small-capitalization companies may be more volatile in price and have
significantly lower trading volumes than companies with larger capitalizations.
They may be more vulnerable to adverse business or market developments than
larger-capitalization companies.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). Securities that are not traded on the valuation date are
valued at the mean of the latest quoted bid and asked prices. Prices normally
are taken from the principal market in which each security trades. Investments
in mutual funds are valued at their net asset value as of the close of the New
York Stock Exchange on the date of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: a security the trading for which has been
halted or suspended; a debt security that has recently gone into default and for
which there is not a current market quotation; a security of an issuer that has
entered into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; a security where the trading on that security's principal market
is temporarily closed at a time when, under normal conditions, it would be open.
At October 31, 2007 the Fund did not hold securities that were valued in such a
manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
of net investment income and distributions of net realized capital and currency
gains, if any, annually. All dividends and distributions are reinvested in
shares of the Fund, at net asset value, unless the shareholder elects otherwise.
Dividends and distributions to shareholders are determined in accordance with
federal income tax regulations and may differ from generally accepted accounting
principles in the United States of America. Permanent book/tax differences
relating to income and gains are
20 MainStay Small Cap Growth Fund
reclassified amongst undistributed net investment income, accumulated net
realized gain or loss and paid-in-capital.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (C) on
page 22) are allocated to separate classes of shares pro rata based upon their
relative net assets value on the date the expenses are incurred. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) SECURITIES LENDING. In order to realize additional income the Fund may lend
its securities to broker-dealers and financial institutions. The loans are
collateralized by cash or securities at least equal at all times to the market
value of the securities loaned. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. The Fund may bear
the risk of delay in recovery of, or loss of rights in, the securities loaned
should the borrower of the securities experience financial difficulty. The Fund
receives compensation for lending its securities in the form of fees or it
retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(H) INDEMNIFICATIONS. In the normal course of business, the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote.
However, there can be no assurance that material liabilities related to such
obligations will not arise in the future which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager") a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. NYLIM provides offices and conducts clerical, recordkeeping and
bookkeeping services, and is responsible for the financial and accounting
records required to be maintained by the Fund. NYLIM also pays the salaries and
expenses of all personnel affiliated with the Fund and all the operational
expenses that are not the responsibility of the Fund. MacKay Shields LLC (the
"Subadvisor"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life, serves as subadvisor to the Fund and is responsible
for the day-to-day portfolio management of the Fund. Pursuant to the terms of a
Subadvisory Agreement between NYLIM and the Subadvisor, NYLIM pays for the
services of the Subadvisor.
The Fund is contractually obligated to pay NYLIM a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 1.00% on assets up to $1.0 billion and 0.95% on assets in
excess of $1.0 billion. NYLIM has contractually agreed to waive its management
fee by 0.15% to 0.85% on assets up to $1.0 billion and to 0.80% on assets in
excess of $1.0 billion, which is not recoupable.
Effective March 1, 2007, NYLIM has entered into a written expense limitation
agreement under which it has agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses (total annual operating expenses
excluding taxes, interest, litigation, extraordinary expenses, and brokerage and
other transaction expenses relating to the purchase or sale of portfolio
investments) do not exceed the following amounts of average daily net assets for
each class: Class A, 1.48%; Class B, 2.23%; Class C, 2.23% and Class I, 0.93%.
This expense limitation may be modified or terminated only with the approval of
the Board of Trustees. NYLIM may recoup the amount of any management fee waivers
or expense reimbursements from the Fund pursuant to the
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
agreement if such action does not cause the Fund to exceed existing expense
limitations and the recoupment is made within three years after the year in
which NYLIM incurred the expense.
For the year ended October 31, 2007, NYLIM earned fees from the Fund in the
amount of $2,049,086 and waived its fees in the amount of $793,792 of which
$486,411 is recoupable.
As of October 31, 2007, the amounts of waived fees that are subject to possible
recoupment by NYLIM, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 2010 TOTAL
$174,275 $705,943 $486,411 $1,366,629
- ---------------------------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Prior to March 1, 2007, the Manager had an agreement in place under which it had
agreed to waive a portion of the Fund's management fee or reimburse the expenses
of the Fund so that the Fund's total ordinary operating expenses did not exceed
1.48% of the Fund's average daily net assets for its Class A shares. NYLIM also
applied an equivalent waiver or reimbursement, in an equal amount of basis
points, to the other share classes of the Fund.
State Street Bank & Trust Company ("SSBT"), One Lincoln Street, Boston,
Massachusetts, 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with NYLIM. These services include calculating
daily net asset values of the Fund, maintaining general ledger and sub-ledger
accounts for the calculation of the Fund's respective net asset values, and
assisting NYLIM in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, SSBT is compensated by
NYLIM.
(B) PAYMENTS FROM AFFILIATES. NYLIM reimbursed or paid all expenses relating to
the Board of Trustees' review of certain shareholder trading matters as
described below in the footnote relating to "Other Matters." (See Note 9 on page
24.)
The total costs associated with the Board of Trustees' review were approximately
$849,975 and included payments to certain third party service providers.
The amount that was reimbursed to the Fund was $32,348. Additional payments were
made by affiliates relating to the shareholder trading matters. Further
discussion regarding these payments by affiliates can be found below in the
footnote relating to "Other Matters."
(C) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, other than Class I shares, has adopted distribution plans
(the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940
Act.
Pursuant to the Class A Plan, the Distributor receives a monthly distribution
fee from the Fund at an annual rate of 0.25% of the average daily net assets of
the Fund's Class A shares, which is an expense of the Class A shares of the Fund
for distribution or service activities as designated by the Distributor.
Pursuant to the Class B and Class C Plans, the Fund pays the Distributor a
monthly distribution fee, which is an expense of the Class B and Class C shares
of the Fund, at the annual rate of 0.75% of the average daily net assets of the
Fund's Class B and Class C shares. The Plans provide that the Class B and Class
C shares of the Fund also incur a service fee at the annual rate of 0.25% of the
average daily net asset value of the Class B and Class C shares of the Fund.
Class I shares are not subject to a distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(D) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $29,536 for the year ended
October 31, 2007. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $2,528, $145,642 and $1,372, respectively, for the year ended October
31, 2007.
(E) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund, for the year ended October 31, 2007,
amounted to $936,280.
(F) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts, effective March 1, 2007. Shareholders with an account
balance of less than $1,000 are charged an annual per account fee of $20
(assessed semi-annually).
22 MainStay Small Cap Growth Fund
(G) CAPITAL. At October 31, 2007, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $ 337 0.0*%
- ------------------------------------------------------------
Class C 186 0.0*
- ------------------------------------------------------------
Class I 3,136,474 83.8
- ------------------------------------------------------------
</Table>
* Less than one-tenth of a percent.
(H) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2007, these fees, which are included in professional fees
shown on the Statement of Operations, were $7,673.
The Fund pays the Manager a monthly fee for certain pricing and recordkeeping
services provided under the Accounting Agreement at the annual rate of 1/20 of
1% for the first $20 million of average monthly net assets, 1/30 of 1% of the
next $80 million of average monthly net assets and 1/100 of 1% of any amount in
excess of $100 million of average monthly net assets. Fees for these services
provided to the Fund by the Manager amounted to $47,157 for the year ended
October 31, 2007.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2007, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$-- $(77,199,117) $-- $15,251,778 $(61,947,339)
----------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized appreciation is
primarily due to wash sales deferrals.
The following table discloses the current year reclassifications between
accumulated net investment loss and additional paid-in capital, arising from
permanent differences; net assets at October 31, 2007 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED NET
NET INVESTMENT RELATED GAIN (LOSS) ADDITIONAL
INCOME (LOSS) ON INVESTMENTS PAID-IN CAPITAL
$2,921,794 $ -- $(2,921,794)
-------------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to net operating losses.
At October 31, 2007, for federal income tax purposes, capital loss carryforwards
of $77,199,117 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. To the extent that these loss carryforwards are used to
offset future capital gains, it is probable that the capital gains so offset
will not be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2009 $34,022
2010 40,252
2011 2,925
-------------------------------------------
$77,199
-------------------------------------------
</Table>
The Fund utilized $56,207,711 of capital loss carryforwards during the year
ended October 31, 2007.
NOTE 5--CUSTODIAN:
SSBT is the custodian of cash and securities of the Fund. Custodial fees are
charged to the Fund based on the market value of securities in the Fund and the
number of certain cash transactions incurred by the Fund.
NOTE 6--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. These funds pay a commitment fee, at an annual rate of .060% of the
average commitment amount, regardless of usage, to The Bank of New York, which
acts as agent to the syndicate. Such commitment fees are allocated among the
funds based upon net assets and other factors. Interest on any revolving credit
loan is charged based upon the Federal Funds Advances rate. There were no
borrowings made or outstanding on the line of credit during the year ended
October 31, 2007.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2007 purchases and sales of securities, other
than short-term securities, were $188,704 and $234,615, respectively.
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 674 $ 11,500
Shares redeemed (2,270) (38,740)
--------------------
Net decrease in shares outstanding
before conversion (1,596) (27,240)
Shares converted from Class B (See Note
1) 672 11,561
--------------------
Net decrease (924) $(15,679)
====================
Year ended October 31, 2006:
Shares sold 1,429 $ 23,323
Shares redeemed (1,845) (30,083)
--------------------
Net increase (decrease) in shares
outstanding before conversion (416) (6,760)
Shares converted from Class B (See Note
1) 2,310 36,614
--------------------
Net increase 1,894 $ 29,854
====================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 435 $ 6,907
Shares redeemed (1,897) (30,127)
--------------------
Net decrease in shares outstanding
before conversion (1,462) (23,220)
Shares reacquired upon conversion into
Class A (See Note 1) (719) (11,561)
--------------------
Net decrease (2,181) $(34,781)
====================
Year ended October 31, 2006:
Shares sold 642 $ 9,914
Shares redeemed (2,361) (36,030)
--------------------
Net decrease in shares outstanding
before conversion (1,719) (26,116)
Shares reacquired upon conversion into
Class A (See Note 1) (2,449) (36,614)
--------------------
Net decrease (4,168) $(62,730)
====================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 52 $ 828
Shares redeemed (155) (2,470)
-------------------
Net decrease (103) $(1,642)
===================
Year ended October 31, 2006:
Shares sold 85 $ 1,316
Shares redeemed (162) (2,460)
-------------------
Net decrease (77) $(1,144)
===================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 217 $3,661
Shares redeemed (35) (612)
------------------
Net increase 182 $3,049
==================
The period May 31, 2006* through
October 31, 2006:
Shares sold 32 $ 517
Shares redeemed --(a) --(a)
------------------
Net increase 32 $ 517
==================
</Table>
* Commencement of Operations.
(a) Less than one thousand.
NOTE 9--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission ("SEC") and the New York State
Attorney General, and, as noted in the notes to the year-end 2004, 2005 and 2006
financial statements of each fund of the Trust, NYLIM was previously a party to
arrangements with certain registered representatives of broker-dealers relating
to the level of trading by clients of those registered representatives in shares
of certain funds of the Trust. All such arrangements were terminated by the
fourth quarter of 2003.
NYLIM and the Trustees of the Trust undertook a review of the possible dilutive
effects that transactions under those arrangements and certain other levels of
trading by Fund shareholders over the period from 1999 to 2003 may have had on
the funds. As a result of this review, in December 2005, NYLIM made payments
totaling $5.882 million to nine MainStay funds. The amount paid to the MainStay
Small Cap Growth Fund was $38,000. NYLIM has reimbursed or paid all expenses
relating to the Board of Trustees' review of this matter.
In a separate matter, in 2004 the SEC raised concerns relating to a guarantee
provided to shareholders of the MainStay Equity Index Fund and the fees and
expenses of that Fund as well as the related guarantee disclosure to that fund's
shareholders. Discussions have been held with the SEC concerning a possible
resolution of this matter. There can be no assurance of the outcome of these
efforts.
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS:
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in
24 MainStay Small Cap Growth Fund
filing tax returns (including whether an entity is taxable in a particular
jurisdiction), and requires certain expanded tax disclosures. The Interpretation
becomes effective for the Fund's 2008 fiscal year, and is to be applied to all
open tax years as of the date of effectiveness. Based on Management's analysis,
the determination has been made that the adoption of the interpretation on
November 1, 2007, did not have an impact on the Fund's financial statements upon
adoption. Management continually reviews the Fund's tax positions and such
conclusions under the Interpretation based on factors, including, but not
limited to, ongoing analyses of tax laws, regulations and interpretations,
thereof.
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The changes to current generally accepted accounting
principles from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures
about fair value measurements. As of October 31, 2007, the Fund does not believe
the adoption of SFAS No. 157 will impact the amounts reported in the Fund's
financial statements. However, additional disclosures may be required about the
inputs used to develop the measurements and the effect of certain measurements
reported in the financial statements for a fiscal period.
www.mainstayfunds.com 25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Small Cap Growth Fund ("the
Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2007, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years or periods in the
two-year period then ended, and the financial highlights for each of the years
or periods in the four-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for the
periods presented through October 31, 2003, were audited by other auditors,
whose report dated December 18, 2003, expressed an unqualified opinion thereon.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2007, by correspondence with the custodian
and brokers or by other appropriate procedures where replies from brokers were
not received. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Small Cap Growth Fund of The MainStay Funds as of October 31, 2007, the
results of its operations for the year then ended, the changes in its net assets
for each of the years or periods in the two-year period then ended, and the
financial highlights for each of the years or periods in the four-year period
then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 20, 2007
26 MainStay Small Cap Growth Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with New York Life Investment Management LLC (the "Manager") and the
Subadvisory Agreement between the Manager and MacKay Shields LLC, a wholly-owned
indirect subsidiary of New York Life Investment Management Holdings LLC, an
affiliate of the Manager, (the "Subadvisor"), (each an "Agreement") at a meeting
held on May 22 and 23, 2007. In connection with the approval of each Agreement,
the Trustees reviewed a significant amount of a wide variety of information that
they had requested and received from the Manager and the Subadvisor, and data
and analysis from an outside data provider and a third party consultant. The
Trustees considered various industry trends and regulatory developments in their
deliberations. In considering approval of each Agreement, and in evaluating the
fairness of the compensation to be paid by the Fund, the Trustees met both as a
full Board and in executive session with no Interested Trustee present, in
advance of the meeting at which the Agreements were approved, and they
considered a number of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor, including with respect to the Fund's
emphasis on investing in small cap growth stocks. The Trustees reviewed the
services that the Manager and the Subadvisor have provided historically to the
Fund, and also generally to other series of the Trust. Among other services, the
Manager's services have included investment management services, including
monitoring and evaluating the Subadvisor's investment program and investment
results with respect to the Fund, and the Subadvisor's compliance with the
Fund's investment policies and restrictions, and administrative services,
including working with other service providers of the Trust, maintaining certain
Fund records, providing office space, performing clerical and bookkeeping
services for the Fund, preparing Board materials and Fund filings, and otherwise
managing the Trust's operations. The Subadvisor is responsible for the
day-to-day portfolio management of the Fund, including determining the
composition of assets of the Fund and the timing of the Fund's execution of the
purchase and sale of assets, and its other services include, among other
services, providing reports to the Manager and reviewing certain aspects of Fund
filings. The Trustees considered, among other things, the Manager's and
Subadvisor's management, personnel, resources, operations and portfolio
management capabilities. The Board reviewed reports on the Subadvisor's
brokerage practices, including with respect to best execution of portfolio
trades. The Trustees considered the Manager's supervision of the Fund's service
providers and its attention to the compliance program of the Trust, the Manager,
the Subadvisor and certain other service providers, as well as the Subadvisor's
attention to its compliance program. The Trustees noted the generally favorable
results of a third party review of the services and communications that NYLIM
Service Company LLC, an affiliate of the Manager and the Subadvisor, has
provided to Trust shareholders.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's underperformance when
compared over several time periods with groupings of funds having similar
investment mandates.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information that indicated that the profitability to the Manager and its
affiliates from the Management Agreement with respect to the Fund was moderate,
and from the overall relationship with the Trust was low. The Trustees
considered other benefits that the Manager and its affiliates receive from the
relationship with the Trust, including benefits that NYLIFE Distributors and
MainStay Shareholder Services receive in exchange for services they provide to
the Funds, and certain benefits from soft dollar arrangements. The Trustees
acknowledged certain benefits to the reputation of the Manager and the Trust
from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They considered that, across the Trust
(though not every series or share class), gross transfer agency fees tended to
be relatively high and, therefore, adversely affected gross expense ratios.
Noting that the Trust historically permitted smaller investor accounts, the
Trustees considered measures that had been recently implemented that were
intended to increase the average size of shareholder accounts, including
generally higher investment minimums, and small account fees, and the Trustees
considered
www.mainstayfunds.com 27
potential benefits to the Manager and its affiliates arising from such measures.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the Manager's willingness to implement a
contractual breakpoint that would reduce the Fund's management fee at asset
levels above the breakpoint, and the fact that the breakpoint was intended to
provide that shareholders would share in benefits from economies of scale
obtained through the growth in the Fund's assets. The Trustees noted that the
Fund not reached the asset level at which the breakpoint would reduce the Fund's
management fee rate. The Trustees reviewed information about the potential
effect of asset growth on Fund expenses, the difficulty of forecasting its
effect on the profitability of the Manager and its affiliates, and the
management fee breakpoints applicable to the Fund and certain other funds. It
was noted that, to the extent the Fund's gross expenses currently were higher
than its net expenses, the reduction of the Fund's gross expenses through the
achievement of economies of scale might benefit the Manager by reducing the
expenses the Manager must reimburse to the Fund rather than directly benefiting
the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by the
Fund, the Trustees evaluated factors such as the fees and expenses borne by
other registered funds in the market pursuing strategies generally similar to
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts having investment strategies similar to that
of the Fund, and took account of explanations and other information relating to
the fees and expenses of those other funds and accounts. The Trustees considered
the current and proposed contractual and net management fees, its anticipated
gross and net expense ratio, and various components of the expense ratio, in
comparison to other funds in comparison groupings. The Trustees generally
acknowledged the historical relationships among the Manager, the Subadvisor and
the Trust and the likely difficulties in implementing an alternative to the
investment management arrangement between the Trust and the Manager. The
Trustees noted the Manager's agreement to continue to waive a certain portion of
its management fee and maintain the existing contractual limitation on the
Fund's net expenses.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings, with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. This summary set out
above describes the most important, but not all, of the factors considered by
the Trustees in considering each Agreement. On the basis of their review, a
majority of the Trustees and a majority of the Non-Interested Trustees concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the judgment of a
majority of the Trustees and a majority of the Non-Interested Trustees that
approval of each Agreement was in the best interests of the Fund and its
shareholders.
28 MainStay Small Cap Growth Fund
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
or (iii) on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 1-800-MAINSTAY (1-800-624-6782). You also can obtain and review copies
of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC
(information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330).
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of The MainStay Funds (the
"Trust") was held on May 4, 2007, at the offices of New York Life Investment
Management LLC in Parsippany, New Jersey. The purpose of the meeting was to
elect the following individuals to the Board of Trustees of the Trust:
- Susan B. Kerley
- Alan R. Latshaw
- Peter Meenan
- Richard H. Nolan, Jr.
- Richard S. Trutanic
- Roman L. Weil
- John A. Weisser
- Brian A. Murdock (Interested Trustee)
There are no other Trustees of the Trust.
No other business came before the special meeting. The proposal to elect
Trustees was passed by the shareholders of the Fund as shown below:
<Table>
<Caption>
SMALL CAP
GROWTH VOTES VOTES
FUND FOR WITHHELD ABSTENTIONS TOTAL
Susan B.
Kerley 4,327,296.699 58,786.845 4,171.000 4,390,254.544
- ------------------------------------------------------------------------
Alan R.
Latshaw 4,341,214.758 44,868.786 4,171.000 4,390,254.544
- ------------------------------------------------------------------------
Peter Meenan 4,327,675.843 58,407.701 4,171.000 4,390,254.544
- ------------------------------------------------------------------------
Richard H.
Nolan, Jr. 4,338,336.023 47,747.521 4,171.000 4,390,254.544
- ------------------------------------------------------------------------
Richard S.
Trutanic 4,328,044.992 58,038.552 4,171.000 4,390,254.544
- ------------------------------------------------------------------------
Roman L. Weil 4,327,402.302 58,681.242 4,171.000 4,390,254.544
- ------------------------------------------------------------------------
John A.
Weisser 4,340,054.901 46,028.643 4,171.000 4,390,254.544
- ------------------------------------------------------------------------
Brian A.
Murdock 4,329,190.994 56,892.550 4,171.000 4,390,254.544
- ------------------------------------------------------------------------
</Table>
This resulted in approval of the proposal.
www.mainstayfunds.com 29
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Pursuant to
notice, a Special Meeting of Shareholders of the Trust was held on May 4, 2007,
at NYLIM's offices in Parsippany, New Jersey. The Trustees listed below were
elected to serve the Trust effective June 7, 2007.
Each Trustee serves until his or her successor is elected and qualified or until
his or her resignation, death or removal. The Retirement Policy provides that a
Trustee shall tender his or her resignation upon reaching age 72. A Trustee
reaching the age of 72 may continue for additional one-year periods with the
approval of the Board's Nominating and Governance Committee, except that no
Trustee shall serve on the Board past his or her 75th birthday. Officers serve a
term of one year and are elected annually by the Trustees. The business address
of each Trustee and officer listed below is 51 Madison Avenue, New York, New
York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF FUNDS
POSITION(S) HELD IN FUND COMPLEX
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
BRIAN A. MURDOCK Indefinite; Member of the Board of Managers 73 Trustee, Eclipse Funds since
3/14/56 Trustee and Chief and President (since 2004) and June, 2007 (3 funds); Director,
Executive Officer Chief Executive Officer (since Eclipse Funds Inc. since June
since 2006 2006), New York Life Investment 2007 (22 funds); Director,
Management LLC and New York MainStay VP Series Fund, Inc.,
Life Investment Management since 2006 (24 portfolios);
Holdings LLC; Senior Vice Director, ICAP Funds, Inc.,
President, New York Life since 2006 (3 funds)
Insurance Company (since 2004);
Chairman of the Board and
President, NYLIFE Distributors
LLC (since 2004); Member of the
Board of Managers, NYLCAP
Manager LLC and Madison Capital
Funding LLC (since 2004),
MacKay Shields LLC and
Institutional Capital LLC
(since 2006), and McMorgan &
Company LLC (since 2007); Chief
Executive Officer, Eclipse
Funds and Eclipse Funds Inc.
(since 2006); Chairman (2006 to
2007) and Director and Chief
Executive Officer (since 2006),
MainStay VP Series Fund, Inc.;
Director and Chief Executive
Officer, ICAP Funds, Inc.
(since 2006); Chief Investment
Officer, MLIM Europe and Asia
(2001 to 2003); President of
Merrill Japan and Chairman of
MLIM's Pacific Region (1999 to
2001)
-----------------------------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow Capital
Management, Inc., McMorgan & Company LLC, NYLIFE Securities Inc. and/or NYLIFE
Distributors LLC, as described in detail above in the column "Principal
Occupation(s) During Past Five Years."
30 MainStay Small Cap Growth Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. KERLEY Indefinite; Partner, Strategic Management 73 Chairman since 2005 and Trustee
8/12/51 Chairman and Advisors LLC (since 1990) since 2000, Eclipse Funds (3
Trustee since funds); Chairman since 2005 and
June 2007 Director since 1990, Eclipse
Funds Inc. (22 funds); Chairman
and Director, ICAP Funds, Inc.,
since 2006 (3 funds); Chairman
and Director, MainStay VP
Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
Legg Mason Partners Funds,
Inc., since 1991 (30
portfolios)
----------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & Young 73 Trustee, Eclipse Funds since
3/27/51 Trustee and Audit LLP (2002 to 2003); Partner, June 2007 (3 funds); Director,
Committee Arthur Andersen LLP (1989 to Eclipse Funds Inc. since June
Financial Expert 2002); Consultant to the Audit 2007 (22 funds); Director, ICAP
since 2006 and Compliance Committee of The Funds, Inc., since June 2007 (3
MainStay Funds (2004 funds); Director, MainStay VP
to 2006) Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
State Farm Associates Funds
Trusts since 2005 (3
portfolios); Trustee, State
Farm Mutual Fund Trust since
2005 (15 portfolios); Trustee,
State Farm Variable Product
Trust since 2005 (9 portfolios)
----------------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds since
12/5/41 Trustee since President and Chief Executive 2002 (3 funds); Director,
June 2007 Officer, Babson-United, Inc. Eclipse Funds Inc. since 2002
(financial services firm) (2000 (22 funds); Director, ICAP
to 2004); Independent Funds, Inc.,
Consultant (1999 to 2000); Head since 2006 (3 funds); Director,
of Global Funds, Citicorp (1995 MainStay VP Series Fund, Inc.,
to 1999) since June 2007 (24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 73 Trustee, Eclipse Funds since
NOLAN, JR. Trustee since Management; President--Shields/ June 2007 (3 funds); Director,
11/16/46 June 2007 Alliance, Alliance Capital Eclipse Funds Inc. since June
Management (1994 to 2004) 2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 2006
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman (since 1990) and Chief 73 Trustee, Eclipse Funds since
TRUTANIC Trustee since Executive Officer (1990 to June 2007 (3 funds); Director,
2/13/52 1994 1999), Somerset Group Eclipse Funds Inc. since June
(financial advisory firm); 2007 (22 funds); Director, ICAP
Managing Director and Advisor, Funds, Inc., since June 2007 (3
The Carlyle Group (private funds); Director, MainStay VP
investment firm) (2002 to Series Fund, Inc., since June
2004); Senior Managing Director 2007 (24 portfolios)
and Partner, Groupe Arnault
S.A. (private investment firm)
(1999
to 2002)
----------------------------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 31
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEE
ROMAN L. WEIL Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds since
5/22/40 Trustee and Audit Accounting, Graduate School of June 2007 (3 funds); Director,
Committee Business, University of Eclipse Funds Inc. since June
Financial Expert Chicago; President, Roman L. 2007 (22 funds); Director, ICAP
since June 2007 Weil Associates, Inc. Funds, Inc., since June 2007 (3
(consulting firm) funds); Director, MainStay VP
Series Fund, Inc., since 1994
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 73 Trustee, Eclipse Funds since
10/22/41 Trustee since Salomon Brothers, Inc. (1971 to June 2007 (3 funds); Director,
June 2007 1995) Eclipse Funds Inc. since June
2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 1997
(24 portfolios); Trustee,
Direxion Funds (69 funds) and
Direxion Insurance Trust (45
funds) since March 2007
----------------------------------------------------------------------------------------------------------------------
</Table>
Terry L. Lierman resigned as Trustee of the Trust effective May 31, 2007. Edward
J. Hogan, John B. McGuckian and Donald E. Nickelson resigned as Trustees of the
Trust effective June 7, 2007.
At a meeting of the Board of Trustees held on June 7 and 8, 2007, the following
individuals were appointed to serve as Officers of the Trust effective June 7,
2007:
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ROBERT A. Chief Legal Senior Managing Director, General Counsel and Secretary, New
ANSELMI Officer since York Life Investment Management LLC (including predecessor
10/19/46 2004 advisory organizations) (since 2000); Secretary (since 2001)
and General Counsel (since 2004), New York Life Investment
Management Holdings LLC; Senior Vice President, New York
Life Insurance Company (since 2000); Vice President and
Secretary, McMorgan & Company LLC (since 2001); Secretary,
NYLIM Service Company LLC (since 2005), NYLCAP Manager LLC
(since 2004), Madison Capital Funding LLC (since 2002), and
Institutional Capital LLC (since 2006); Chief Legal Officer,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), McMorgan Funds (since 2005) and
ICAP Funds, Inc. (since 2006); Managing Director and Senior
Counsel, Lehman Brothers Inc. (1998 to 1999); General
Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998)
-------------------------------------------------------------------------------------------------
JACK R. Treasurer and Managing Director, New York Life Investment Management LLC
BENINTENDE Principal (since June 2007); Treasurer and Principal Financial and
5/12/64 Financial and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
Accounting MainStay VP Series Fund, Inc., and ICAP Funds, Inc. (since
Officer since June 2007); Vice President, Prudential Investments (2000 to
June 2007 2007); Assistant Treasurer, JennisonDryden Family of Funds,
Target Portfolio Trust, The Prudential Series Fund and
American
Skandia Trust (2006 to 2007); Treasurer and Principal
Financial Officer, The Greater China
Fund (2007)
-------------------------------------------------------------------------------------------------
STEPHEN P. President since Senior Managing Director and Chief Marketing Officer, New
FISHER March 2007 York Life Investment Management LLC (since 2005); Managing
2/22/59 Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since March 2007); Managing Director, UBS
Global Asset Management (1999 to 2003)
-------------------------------------------------------------------------------------------------
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration predecessor advisory organizations) (since 2000); Executive
2/8/59 since 2005 Vice President, New York Life Trust Company (since 2006);
Vice President--Administration, Eclipse Funds, Eclipse Funds
Inc. and MainStay VP Series Fund, Inc. (since 2005) and ICAP
Funds, Inc. (since 2006)
-------------------------------------------------------------------------------------------------
</Table>
32 MainStay Small Cap Growth Fund
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Senior Managing Director and Chief Compliance Officer (since
MICUCCI President and 2006) and Managing Director and Chief Compliance Officer
12/16/65 Chief Compliance (2003 to 2006), New York Life Investment Management LLC and
Officer since New York Life Investment Management Holdings LLC; Senior
2006 Managing Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE Distributors
LLC; Chief Compliance Officer, NYLCAP Manager LLC (since
2006); Senior Vice President and Chief Compliance Officer,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund,
Inc., and ICAP Funds, Inc. (since 2006); Vice President--
Compliance, Eclipse Funds, Eclipse Funds Inc. and MainStay
VP Series Fund, Inc. (2004 to 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002)
-------------------------------------------------------------------------------------------------
MARGUERITE E.H. Secretary since Managing Director and Associate General Counsel, New York
MORRISON* 2004 Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC (since
2005); Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP Funds,
Inc. (since 2006); Chief Legal Officer--Mutual Funds and
Vice President and Corporate Counsel, The Prudential
Insurance Company of America (2000 to 2004)
-------------------------------------------------------------------------------------------------
</Table>
* In addition to serving as Secretary to the Trust, effective January 1, 2008,
Marguerite E.H. Morrison will assume the role of Chief Legal Officer to the
Trust.
Arphiela Arizmendi resigned as Treasurer and Principal Financial and Accounting
Officer of the Trust effective June 7, 2007.
Christopher O. Blunt resigned as President of the Trust effective March 12,
2007.
Alan J. Kirshenbaum resigned as Senior Vice President of the Trust effective
March 19, 2007.
www.mainstayfunds.com 33
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay 130/30 Core Fund
MainStay 130/30 Growth Fund
MainStay All Cap Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay 130/30 High Yield Fund(2)
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Institutional Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Principal Preservation Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay 130/30 International Fund
MainStay Global High Income Fund
MainStay ICAP International Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
RETIREMENT FUNDS
MainStay Retirement 2010 Fund
MainStay Retirement 2020 Fund
MainStay Retirement 2030 Fund
MainStay Retirement 2040 Fund
MainStay Retirement 2050 Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
New York, New York
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
Chicago, Illinois
MACKAY SHIELDS LLC(3)
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
MCMORGAN & COMPANY LLC(3)
San Francisco, California
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
This page intentionally left blank
(NEW YORK LIFE LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2007 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A011872 (RECYCLE LOGO) MS329-07 MSSG11-12/07
24
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
SMALL CAP VALUE FUND
Message from the President
and
Annual Report
October 31, 2007
MESSAGE FROM
THE PRESIDENT
The 12-month period ended October 31, 2007, was a dynamic one for mutual fund
investors. U.S. equity markets generally advanced, with growth stocks out-
performing value stocks at all capitalization levels. Although past performance
is no guarantee of future results, international stocks as a whole provided even
stronger returns for U.S. investors.
The progress of the equity markets, however, was far from steady. In February,
weakness in Asian markets led to sharp price declines around the globe. The
correction caused many investors to reconsider whether China and other emerging
economies could sustain their rapid growth. Fortunately, strong
corporate-earnings reports and positive economic news helped the stock market
regain its footing.
In July and August, difficulties in the subprime-mortgage market led to another
stock-market correction. A number of high-profile mortgage originators either
closed their doors or were sold to larger entities. Other leading financial
services firms faced major write-offs because of subprime-mortgage exposure.
The Federal Open Market Committee (FOMC) took prompt action to increase
liquidity and stabilize the financial markets by lowering the discount rate and
the federal funds target rate during the reporting period. These Federal Reserve
moves helped calm investor concerns, and the stock market generally advanced
from August 16, 2007, the date of an unscheduled FOMC meeting, through the end
of October 2007.
Difficulties in the subprime-mortgage market led to a "flight to quality," or a
general movement toward fixed-income securities that carry lower risk. As demand
for short- and intermediate-term Treasury securities increased, yields fell
across much of the maturity spectrum. Yields rose, however, on 20-and 30-year
Treasury bonds, and the yield curve steepened during the 12-month reporting
period.
High-yield bonds rallied from November 2006 through May 2007. But in June and
July, the yield differences--or spreads--between high-yield bonds and comparable
Treasury securities began to widen. At the end of October 2007, these spreads
were wider than when the reporting period began, making high-yield securities
more attractive to investors willing to accept higher risk.
To help investors address the challenges of today's ever-changing markets, New
York Life Investment Management LLC provides access to seven institutional
investment boutiques, each with its own proprietary research and investment
culture. As advisors and subadvisors to MainStay Funds, these boutiques bring a
wealth of experience and market insight to our shareholders. The portfolio
managers of each MainStay Fund seek to consistently apply time-tested investment
principles across a wide variety of market environments.
The report that follows provides more specific information about the market
forces and investment decisions that affected your investment in MainStay Funds
from November 1, 2006, through October 31, 2007. Please read the report
carefully. As you do, bear in mind that this annual report reflects just a short
segment of your lifetime investment journey. We look forward to continuing to
work with you, wherever that journey may lead.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
SMALL CAP VALUE FUND
MainStay Funds
Annual Report
October 31, 2007
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 10
- --------------------------------------------------------------------------------
Financial Statements 13
- --------------------------------------------------------------------------------
Notes to Financial Statements 18
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 23
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 24
- --------------------------------------------------------------------------------
Federal Income Tax Information 26
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 26
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 26
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 26
- --------------------------------------------------------------------------------
Trustees and Officers 27
</Table>
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT
MONTH-END PERFORMANCE INFORMATION, PLEASE CALL 1-800-MAINSTAY (1-800-624-6782)
OR VISIT WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges -9.86% 9.55% 7.29%
Excluding sales charges -4.62 10.79 7.93
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY SMALL CAP VALUE FUND RUSSELL 2000 VALUE INDEX
----------------------------- ------------------------
6/1/98 9450 10000
7758 8408
8193 8469
11214 9934
12264 10803
11622 10530
15154 14772
17346 17430
17937 19703
20341 24214
10/31/07 19402 24710
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges -9.63% 9.67% 7.13%
Excluding sales charges -5.34 9.94 7.13
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY SMALL CAP VALUE FUND RUSSELL 2000 VALUE INDEX
----------------------------- ------------------------
6/1/98 10000 10000
8190 8408
8590 8469
11656 9934
12648 10803
11911 10530
15409 14772
17503 17430
17970 19703
20212 24214
10/31/07 19133 24710
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges -6.27% 9.94% 7.13%
Excluding sales charges -5.41 9.94 7.13
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY SMALL CAP VALUE FUND RUSSELL 2000 VALUE INDEX
----------------------------- ------------------------
6/1/98 10000 10000
8190 8408
8590 8469
11656 9934
12648 10803
11911 10530
15398 14772
17503 17430
17967 19703
20225 24214
10/31/07 19130 24710
</Table>
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect maximum applicable sales charges explained in this paragraph, change in
share price, and reinvestment of dividend and capital-gain distributions. The
graphs assume an initial investment of $10,000 and reflect the deduction of all
sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase and have an annual 12b-1 fee of 1.00%.
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee and are generally available
to corporate and institutional investors with a minimum initial investment of $5
million. Performance figures reflect certain fee waivers and/or expense
limitations, without which total returns may have been lower. These fee waivers
and/or expense limitations are contractual and may be modified or terminated
only with the approval of the Board of Trustees. The Manager may recoup the
amount of certain management fee waivers or expense reimbursements from the Fund
pursuant to the contract if such action does not cause the Fund to exceed
existing expense limitations and the recoupment is made within three years after
the year in which the Manager incurred the expense. From inception (6/1/98)
through 8/31/98, performance for Class C shares (first offered 9/1/98) includes
the historical
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
-4.63% 11.07% 8.20%
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY SMALL CAP VALUE FUND RUSSELL 2000 VALUE INDEX
----------------------------- ------------------------
6/1/98 10000 10000
8219 8408
8701 8469
11939 9934
13089 10803
12435 10530
16254 14772
18652 17430
19375 19703
22037 24214
10/31/07 21017 24710
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
- -----------------------------------------------------------------------------------
Russell 2000(R) Value Index(1) 2.05% 18.60% 10.08%
Average Lipper small-cap value fund(2) 6.26 17.60 9.84
</Table>
performance of Class B shares adjusted to reflect the applicable CDSC for Class
C shares. From inception through 2/15/05, performance of Class I shares (first
offered 2/16/05) includes the historical performance of Class A shares adjusted
to reflect the applicable sales charge (or CDSC), fees, estimated expenses and
fee waivers/expense limitations of Class C and Class I shares upon initial
offer. Unadjusted, the performance shown for the newer classes of shares might
have been lower.
1. The Russell 2000(R) Value Index is an unmanaged index that measures the
performance of those Russell 2000(R) companies with lower price-to-book
ratios and lower forecasted growth values. The Russell 2000(R) Index is an
unmanaged index that measures the performance of the 2,000 smallest companies
in the Russell 3000(R) Index, which, in turn, is an unmanaged index that
measures the performance of the 3,000 largest U.S. companies based on total
market capitalization. Results assume reinvestment of all income and capital
gains. The Russell 2000(R) Value Index is considered to be the Fund's
broad-based securities-market index for comparison purposes. An investment
cannot be made directly in an index.
2. Lipper Inc. is an independent monitor of fund performance. Results are based
on total returns with all dividend and capital-gain distributions reinvested.
THE DISCLOSURE ON THE PRECEDING PAGE IS AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Small Cap Value Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY SMALL CAP VALUE FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2007, to October 31, 2007,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1,
2007, to October 31, 2007.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six-months ended October 31, 2007. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/07 10/31/07 PERIOD(1) 10/31/07 PERIOD(1)
CLASS A SHARES $1,000.00 $915.70 $ 6.95 $1,017.80 $ 7.32
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $911.75 $10.55 $1,014.05 $11.12
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $911.75 $10.55 $1,014.05 $11.12
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $918.55 $ 4.98 $1,019.85 $ 5.24
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's net annualized expense ratio of each class
(1.44% for Class A, 2.19% for Class B and Class C, and 1.03% for Class I)
multiplied by the average account value over the period, divided by 365 and
multiplied by 184 (to reflect the one-half year period).
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2007
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 99.0
Short-Term Investments (collateral from securities lending 32.0
is 30.7%)
Liabilities in Excess of Cash and Other Assets (31.0)
</Table>
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2007 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Genco Shipping & Trading, Ltd.
2. Stone Energy Corp.
3. ScanSource, Inc.
4. Worthington Industries, Inc.
5. Olin Corp.
6. First Community Bancorp
7. Brigham Exploration Co.
8. Callon Petroleum Co.
9. Laclede Group, Inc. (The)
10. Saul Centers, Inc.
</Table>
8 MainStay Small Cap Value Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Mark T. Spellman of MacKay Shields LLC
HOW DID MAINSTAY SMALL CAP VALUE FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK FOR THE 12-MONTH REPORTING PERIOD?
Excluding all sales charges, MainStay Small Cap Value Fund returned -4.62% for
Class A shares, -5.34% for Class B shares and -5.41% for Class C shares for the
12 months ended October 31, 2007. Over the same period, Class I shares returned
- -4.63%. All share classes underperformed the 6.26% return of the average
Lipper(1) small-cap value fund and the 2.05% return of the Russell 2000(R) Value
Index(2) for the 12 months ended October 31, 2007. The Russell 2000(R) Value
Index is the Fund's broad-based securities-market index. See page 5 for Fund
returns with sales charges.
DURING THE REPORTING PERIOD, WHAT WERE SOME OF THE FUND'S BEST-PERFORMING
INDIVIDUAL STOCKS?
The Fund purchased shares of Cooper Tire & Rubber in December 2006. The company
benefited from better product pricing and volume and from wage and benefit
concessions from a unionized workforce. We eliminated the position at the end of
June when the stock reached our price target. After the sale, the stock declined
sharply. Glass maker Apogee Enterprises was also a strong performer.
Improvements in operations led to higher cash flows, and the company's stock
price responded favorably. We eliminated the holding in June, when the shares
hit our price target. Ship transportation company Genco Shipping & Trading rose
sharply after we first purchased the stock in June 2007. The advance was driven
by excellent volume and pricing trends in the company's mineral and agricultural
cargo shipping businesses. Although we trimmed the position, the stock remained
part of the Fund's portfolio.
WHICH STOCKS DETRACTED FROM THE PERFORMANCE DURING THE REPORTING PERIOD?
Paperboard manufacturer Caraustar Industries faced difficult industry
fundamentals that weighed on its shares. We sold the Fund's position in the
stock in early January on the belief that improvements would take several
quarters. After the sale, the stock con-tinued to decline sharply. The Fund's
position in American Home Mortgage Investment was hurt by a liquidity crunch,
when lines of credit were pulled at sponsor banks during the subprime mortgage
crisis. Without lines of credit, mortgage providers cannot conduct normal
business. We eliminated the Fund's position in American Home Mortgage Investment
in early August, shortly before the company filed for Chapter 11 bankruptcy
protection. The Fund's position in homebuilder TOUSA was negatively affected by
the downturn in the housing market. The company's shares fell sharply during the
reporting period, and the Fund's position has since been sold.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
The Fund's most significant purchases included Cooper Tire & Rubber and Genco
Shipping & Trading. Other purchases included Stone Energy and Alpha Natural
Resources. Significant sales included Cooper Tire & Rubber, Caraustar Industries
and American Home Mortgage Investment. Other sales included Premium Global
Services and SafeNet.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2007, the Fund was overweight in energy relative to the
Russell 2000(R) Value Index. This positioning contributed positively to the
Fund's performance. The Fund was also overweight in consumer discretionary and
industrials, which detracted from performance. On the same date, the Fund was
underweight in health care, financials, information technology and consumer
staples, which detracted from relative performance.
Stocks of small companies may be subject to higher price volatility,
significantly lower trading volumes and greater spreads between bid and ask
prices than stocks of larger companies. Small companies may be more vulnerable
to adverse business or market developments than mid- or large-capitalization
companies. The principal risk of investing in value stocks is that they may
never reach what the portfolio manager believes is their full value or they may
even go down in value.
1. See footnote on page 6 for more information on Lipper Inc.
2. See footnote on page 6 for more information on the Russell 2000(R) Value
Index.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecasts made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (99.0%)+
- ------------------------------------------------------------------------------
AEROSPACE & DEFENSE (1.3%)
Hexcel Corp. (a)(b) 41,100 $ 1,028,733
------------
AIRLINES (0.7%)
Republic Airways Holdings, Inc. (a) 28,000 596,120
------------
AUTO COMPONENTS (1.8%)
American Axle & Manufacturing Holdings, Inc. 29,600 812,816
ArvinMeritor, Inc. (b) 40,000 593,200
------------
1,406,016
------------
BUILDING PRODUCTS (2.4%)
NCI Building Systems, Inc. (a)(b) 18,300 716,994
Simpson Manufacturing Co., Inc. (b) 23,000 689,770
Universal Forest Products, Inc. (b) 14,200 508,502
------------
1,915,266
------------
CAPITAL MARKETS (4.8%)
Hercules Technology Growth Capital, Inc. (b) 75,200 964,816
KBW, Inc. (a)(b) 29,200 884,468
Knight Capital Group, Inc. Class A (a) 49,800 667,818
NGP Capital Resources Co. (b) 54,600 874,146
Prospect Capital Corp. (b) 27,300 399,672
------------
3,790,920
------------
CHEMICALS (2.8%)
V Olin Corp. (b) 51,400 1,170,892
Tronox, Inc. Class A 59,500 506,345
Westlake Chemical Corp. 22,700 557,058
------------
2,234,295
------------
COMMERCIAL BANKS (9.5%)
Center Financial Corp. 44,200 565,318
F.N.B. Corp. (b) 45,577 757,490
First Commonwealth Financial Corp. (b) 57,900 665,271
V First Community Bancorp (b) 22,600 1,100,620
First Regional Bancorp (a) 31,000 728,500
Independent Bank Corp. (b) 24,765 732,549
Lakeland Financial Corp. (b) 33,100 692,121
Old National Bancorp (b) 40,600 678,426
Sandy Spring Bancorp, Inc. 29,100 864,852
Simmons First National Corp. Class A 29,800 805,792
------------
7,590,939
------------
COMMERCIAL SERVICES & SUPPLIES (1.7%)
Casella Waste Systems, Inc. Class A (a) 48,300 711,459
Labor Ready, Inc. (a) 35,300 620,574
------------
1,332,033
------------
</Table>
<Table>
<Caption>
SHARES VALUE
COMMUNICATIONS EQUIPMENT (1.0%)
Mastec, Inc. (a) 52,400 $ 827,396
------------
CONSUMER FINANCE (0.7%)
EZCORP, Inc. Class A (a) 44,100 580,356
------------
CONTAINERS & PACKAGING (1.3%)
Chesapeake Corp. 55,800 413,478
Rock-Tenn Co. Class A 22,300 650,268
------------
1,063,746
------------
DIVERSIFIED CONSUMER SERVICES (0.8%)
Pre-Paid Legal Services, Inc. (a)(b) 10,800 643,680
------------
DIVERSIFIED FINANCIAL SERVICES (0.6%)
Medallion Financial Corp. 47,400 500,070
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (1.6%)
Consolidated Communications Holdings, Inc. 38,000 756,580
Iowa Telecommunications Services, Inc. (b) 27,000 532,440
------------
1,289,020
------------
ELECTRIC UTILITIES (4.1%)
Empire District Electric Co. (The) 27,500 661,375
IDACORP, Inc. (b) 19,100 666,399
MGE Energy, Inc. 21,500 720,250
Portland General Electric Co. 22,600 636,190
UniSource Energy Corp. 19,200 609,024
------------
3,293,238
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (6.1%)
Insight Enterprises, Inc. (a) 26,900 743,516
Park Electrochemical Corp. 29,800 933,336
V ScanSource, Inc. (a) 34,500 1,274,430
SYNNEX Corp. (a) 30,600 684,522
Technitrol, Inc. 23,300 685,253
Zygo Corp. (a) 47,700 560,952
------------
4,882,009
------------
ENERGY EQUIPMENT & SERVICES (1.9%)
Basic Energy Services, Inc. (a)(b) 38,000 752,020
Complete Production Services, Inc. (a) 39,600 788,040
------------
1,540,060
------------
FOOD & STAPLES RETAILING (1.0%)
Great Atlantic & Pacific Tea Co. (The) (a)(b) 25,000 809,250
------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
10 MainStay Small Cap Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
GAS UTILITIES (1.4%)
V Laclede Group, Inc. (The) 31,000 $ 1,078,490
------------
HEALTH CARE EQUIPMENT & SUPPLIES (1.0%)
Invacare Corp. 28,000 757,680
------------
HOTELS, RESTAURANTS & LEISURE (3.1%)
Ameristar Casinos, Inc. 26,700 869,085
Domino's Pizza, Inc. 49,300 761,192
Luby's, Inc. (a) 73,500 812,175
------------
2,442,452
------------
HOUSEHOLD DURABLES (1.3%)
Furniture Brands International, Inc. (b) 22,000 265,100
Hooker Furniture Corp. 33,300 717,282
TOUSA, Inc. (b) 122,200 89,206
------------
1,071,588
------------
INDUSTRIAL CONGLOMERATES (0.9%)
Walter Industries, Inc. 24,600 753,744
------------
INSURANCE (4.2%)
Infinity Property & Casualty Corp. 15,100 607,322
Midland Co. (The) 15,400 979,748
Presidential Life Corp. 33,700 593,457
RLI Corp. 12,800 744,576
Selective Insurance Group, Inc. 18,637 453,065
------------
3,378,168
------------
INTERNET & CATALOG RETAIL (0.9%)
Netflix, Inc. (a)(b) 28,000 741,160
------------
IT SERVICES (1.8%)
infoUSA, Inc. 63,400 666,968
TNS, Inc. 48,300 780,045
------------
1,447,013
------------
LEISURE EQUIPMENT & PRODUCTS (0.7%)
Arctic Cat, Inc. (b) 36,800 530,656
------------
MACHINERY (1.8%)
Miller Industries, Inc./TN (a) 29,100 422,241
Watts Water Technologies, Inc. Class A (b) 25,300 719,279
Xerium Technologies, Inc. 75,200 309,072
------------
1,450,592
------------
MARINE (2.0%)
V Genco Shipping & Trading, Ltd. 22,000 1,581,580
------------
</Table>
<Table>
<Caption>
SHARES VALUE
MEDIA (3.1%)
Lodgenet Entertainment Corp. (a)(b) 22,300 $ 481,011
New Frontier Media, Inc. 91,100 552,977
Playboy Enterprises, Inc. Class B (a) 74,500 834,400
Sinclair Broadcast Group, Inc. Class A (b) 47,200 568,288
------------
2,436,676
------------
METALS & MINING (3.7%)
Northwest Pipe Co. (a)(b) 22,800 841,776
Quanex Corp. 20,700 852,633
V Worthington Industries, Inc. (b) 50,800 1,270,000
------------
2,964,409
------------
MULTILINE RETAIL (0.4%)
Tuesday Morning Corp. (b) 42,400 323,088
------------
OIL, GAS & CONSUMABLE FUELS (9.0%)
Alpha Natural Resources, Inc. (a) 35,000 960,400
V Brigham Exploration Co. (a) 149,200 1,099,604
V Callon Petroleum Co. (a) 75,300 1,097,874
Foundation Coal Holdings, Inc. 12,400 529,728
Global Partners, L.P./MA 18,500 575,535
Penn Virginia Corp. 9,400 454,960
RAM Energy Resources, Inc. (a)(b) 162,600 874,788
V Stone Energy Corp. (a) 34,700 1,546,926
------------
7,139,815
------------
PAPER & FOREST PRODUCTS (1.9%)
Bowater, Inc. 14,612 500,607
Buckeye Technologies, Inc. (a) 58,800 1,053,696
------------
1,554,303
------------
PERSONAL PRODUCTS (0.5%)
Prestige Brands Holdings, Inc. (a) 38,100 398,526
------------
REAL ESTATE INVESTMENT TRUSTS (6.1%)
Associated Estates Realty Corp. 58,400 708,976
Crystal River Capital, Inc. (b) 23,700 344,835
FelCor Lodging Trust, Inc. 32,090 671,965
JER Investors Trust, Inc. (b) 44,100 492,597
Newcastle Investment Corp. (b) 18,900 280,665
NorthStar Realty Finance Corp. (b) 32,000 299,200
Parkway Properties, Inc. 15,800 679,400
Resource Capital Corp. (b) 28,100 289,992
V Saul Centers, Inc. (b) 19,500 1,068,990
------------
4,836,620
------------
ROAD & RAIL (2.3%)
Frozen Food Express Industries, Inc. 64,300 366,510
Old Dominion Freight Line, Inc. (a) 17,000 384,030
P.A.M. Transportation Services, Inc. (a) 30,100 501,466
Werner Enterprises, Inc. (b) 31,008 589,772
------------
1,841,778
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (1.2%)
Rudolph Technologies, Inc. (a) 42,800 $ 557,684
Spansion, Inc. Class A (a)(b) 51,200 360,960
------------
918,644
------------
SPECIALTY RETAIL (3.3%)
Brown Shoe Co., Inc. 24,600 501,840
Charming Shoppes, Inc. (a) 56,500 419,230
CSK Auto Corp. (a) 35,400 403,560
Dress Barn, Inc. (a) 29,300 480,227
Haverty Furniture Cos., Inc. 48,800 414,800
Talbots, Inc. (b) 28,500 419,235
------------
2,638,892
------------
TEXTILES, APPAREL & LUXURY GOODS (0.6%)
Steven Madden, Ltd. 19,700 439,113
------------
THRIFTS & MORTGAGE FINANCE (1.8%)
BankUnited Financial Corp. Class A (b) 26,700 230,421
PFF Bancorp, Inc. (b) 21,800 232,170
TrustCo Bank Corp., NY (b) 49,283 519,443
United Community Financial Corp. (b) 69,200 442,880
------------
1,424,914
------------
TRADING COMPANIES & DISTRIBUTORS (1.9%)
Electro Rent Corp. 48,600 702,756
Rush Enterprises, Inc. Class B (a) 50,700 813,228
------------
1,515,984
------------
Total Common Stocks
(Cost $88,263,526) 78,989,032
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (32.0%)
- ------------------------------------------------------------------------------
COMMERCIAL PAPER (1.3%)
American Express Credit Corp.
4.75%, due 11/1/07 $ 1,000,000 1,000,000
------------
Total Commercial Paper
(Cost $1,000,000) 1,000,000
------------
<Caption>
SHARES VALUE
INVESTMENT COMPANY (30.7%)
State Street Navigator Securities Lending Prime
Portfolio (c) 24,473,088 $ 24,473,088
------------
Total Investment Company
(Cost $24,473,088) 24,473,088
------------
Total Short-Term Investments
(Cost $25,473,088) 25,473,088
------------
Total Investments
(Cost $113,736,614) 131.0% 104,462,120(d)
Liabilities in Excess of Cash and Other Assets (31.0) (24,701,536)
----------- ------------
Net Assets 100.0% $ 79,760,584
=========== ============
</Table>
<Table>
(a) Non-income producing security.
(b) Represents a security, or a portion thereof, which is out on
loan. The aggregate market value of such securities is
$23,183,234; cash collateral of $24,473,088 (included in
liabilities) was received with which the Fund purchased
highly liquid short-term investments.
(c) Represents a security, or a portion thereof, purchased with
cash collateral received for securities on loan.
(d) At October 31, 2007, cost is $113,730,473 for federal income
tax purposes and net unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 4,385,885
Gross unrealized depreciation (13,654,238)
-------------------
Net unrealized depreciation $ (9,268,353)
===================
</Table>
12 MainStay Small Cap Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2007
<Table>
ASSETS:
Investment in securities, at value (identified
cost $113,736,614) including $23,183,234
market value of securities loaned $ 104,462,120
Cash 68,282
Receivables:
Dividends and interest 100,029
Fund shares sold 70,526
Other assets 15,241
-------------
Total assets 104,716,198
-------------
LIABILITIES:
Securities lending collateral 24,473,088
Payables:
Fund shares redeemed 264,334
Transfer agent (See Note 3) 61,945
Manager (See Note 3) 46,924
Shareholder communication 45,286
NYLIFE Distributors (See Note 3) 42,659
Professional fees 12,467
Custodian 5,004
Trustees 1,381
Accrued expenses 2,526
-------------
Total liabilities 24,955,614
-------------
Net assets $ 79,760,584
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized $ 67,765
Additional paid-in capital 73,318,873
-------------
73,386,638
Accumulated undistributed net investment
income 428,394
Accumulated net realized gain on investments 15,220,046
Net unrealized depreciation on investments (9,274,494)
-------------
Net assets $ 79,760,584
=============
CLASS A
Net assets applicable to outstanding shares $ 44,741,962
=============
Shares of beneficial interest outstanding 3,647,947
=============
Net asset value per share outstanding $ 12.26
Maximum sales charge (5.50% of offering price) 0.71
-------------
Maximum offering price per share outstanding $ 12.97
=============
CLASS B
Net assets applicable to outstanding shares $ 28,197,030
=============
Shares of beneficial interest outstanding 2,519,180
=============
Net asset value and offering price per share
outstanding $ 11.19
=============
CLASS C
Net assets applicable to outstanding shares $ 6,814,886
=============
Shares of beneficial interest outstanding 608,875
=============
Net asset value and offering price per share
outstanding $ 11.19
=============
CLASS I
Net assets applicable to outstanding shares $ 6,706
=============
Shares of beneficial interest outstanding 543
=============
Net asset value and offering price per share
outstanding $ 12.35
=============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 13
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2007
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 2,421,558
Income from securities loaned--net 276,124
Interest 127,685
------------
Total income 2,825,367
------------
EXPENSES:
Manager (See Note 3) 859,258
Transfer agent--Classes A, B and C (See Note
3) 349,253
Transfer agent--Class I (See Note 3) 10,863
Distribution--Class B (See Note 3) 277,413
Distribution--Class C (See Note 3) 69,038
Distribution/Service--Class A (See Note 3) 127,918
Service--Class B (See Note 3) 92,471
Service--Class C (See Note 3) 23,013
Shareholder communication 54,323
Registration 51,265
Professional fees 51,182
Recordkeeping 35,582
Custodian 18,516
Trustees 6,286
Miscellaneous 12,696
------------
Total expenses before reimbursement 2,039,077
Expense reimbursement from Manager (See Note
3) (252,723)
------------
Net expenses 1,786,354
------------
Net investment income 1,039,013
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 15,765,623
Net change in unrealized appreciation on
investments (20,014,055)
------------
Net realized and unrealized loss on investments (4,248,432)
------------
Net decrease in net assets resulting from
operations $(3,209,419)
============
</Table>
14 MainStay Small Cap Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2007 AND OCTOBER 31, 2006
<Table>
<Caption>
2007 2006
DECREASE IN NET ASSETS:
Operations:
Net investment income (loss) $ 1,039,013 $ (121,960)
Net realized gain on
investments 15,765,623 11,894,756
Net change in unrealized
appreciation on investments (20,014,055) 5,788,422
---------------------------
Net increase (decrease) in
net assets resulting from
operations (3,209,419) 17,561,218
---------------------------
Dividends and distributions to shareholders:
From net investment income:
Class A (417,038) --
Class B (21,051) --
Class C (5,209) --
Class I (119,899) --
---------------------------
(563,197) --
---------------------------
From net realized gain on investments:
Class A (4,597,917) (3,270,204)
Class B (4,088,012) (4,639,877)
Class C (1,024,040) (858,745)
Class I (2,249,782) (1,420,830)
---------------------------
(11,959,751) (10,189,656)
---------------------------
Total dividends and
distributions to
shareholders (12,522,948) (10,189,656)
---------------------------
Capital share transactions:
Net proceeds from sale of
shares 11,786,519 26,452,527
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 11,556,410 9,125,289
Cost of shares redeemed (60,254,816) (54,397,056)
Net asset value of shares
converted (See Note 1):
Class A 5,545,030 12,833,164
Class B (5,545,030) (12,833,164)
---------------------------
Decrease in net assets
derived from capital share
transactions (36,911,887) (18,819,240)
---------------------------
Net decrease in net assets (52,644,254) (11,447,678)
NET ASSETS:
Beginning of year 132,404,838 143,852,516
---------------------------
End of year $ 79,760,584 $132,404,838
===========================
Accumulated undistributed net
investment income at end of
year $ 428,394 $ --
===========================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 15
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
---------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning
of period $ 14.19 $ 13.39 $ 15.59 $ 14.09 $ 11.10 $ 12.84
------- ------- ------- ------- ----------- ------------
Net investment income (loss)
(a) 0.17 0.03 (0.05) (0.09) (0.08) (0.09)
Net realized and unrealized
gain (loss) on investments (0.73) 1.70 0.68 2.09 3.07 (1.47)
------- ------- ------- ------- ----------- ------------
Total from investment
operations (0.56) 1.73 0.63 2.00 2.99 (1.56)
------- ------- ------- ------- ----------- ------------
Less dividends and
distributions:
From net investment income (0.11) -- -- -- -- --
From net realized gain on
investments (1.26) (0.93) (2.83) (0.50) -- (0.18)
------- ------- ------- ------- ----------- ------------
Total dividends and
distributions (1.37) (0.93) (2.83) (0.50) -- (0.18)
------- ------- ------- ------- ----------- ------------
Net asset value at end of
period $ 12.26 $ 14.19 $ 13.39 $ 15.59 $ 14.09 $ 11.10
======= ======= ======= ======= =========== ============
Total investment return (b) (4.62%) 13.40% 3.41% 14.46% 26.94%(c) (12.16%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 1.28% 0.19% (0.32%) (0.62%) (0.78%)+ (0.74%)
Net expenses 1.44% 1.40% 1.47% 1.70% 1.90%+ 1.87%
Expenses (before
reimbursement) 1.69% 1.65% 1.72% 1.78% 1.94%+ 1.87%
Portfolio turnover rate 189% 44% 75% 103% 41% 46%
Net assets at end of period
(in 000's) $44,742 $52,995 $47,849 $55,640 $44,496 $35,197
</Table>
<Table>
<Caption>
CLASS C
--------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of period $13.06 $ 12.48 $ 14.80 $ 13.49 $10.70 $12.48
------ ------- ------- ------- ----------- ------------
Net investment income (loss) (a) 0.07 (0.07) (0.15) (0.20) (0.15) (0.18)
Net realized and unrealized gain (loss) on
investments (0.67) 1.58 0.66 2.01 2.94 (1.42)
------ ------- ------- ------- ----------- ------------
Total from investment operations (0.60) 1.51 0.51 1.81 2.79 (1.60)
------ ------- ------- ------- ----------- ------------
Less dividends and distributions:
From net investment income (0.01) -- -- -- -- --
From net realized gain on investments (1.26) (0.93) (2.83) (0.50) -- (0.18)
------ ------- ------- ------- ----------- ------------
Total dividends and distributions (1.27) (0.93) (2.83) (0.50) -- (0.18)
------ ------- ------- ------- ----------- ------------
Net asset value at end of period $11.19 $ 13.06 $ 12.48 $ 14.80 $13.49 $10.70
====== ======= ======= ======= =========== ============
Total investment return (b) (5.41%) 12.56% 2.65% 13.67% 26.07%(c) (12.83%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.56% (0.56%) (1.07%) (1.37%) (1.53%)+ (1.49%)
Net expenses 2.19% 2.15% 2.22% 2.45% 2.65% + 2.62%
Expenses (before reimbursement) 2.44% 2.40% 2.47% 2.53% 2.69% + 2.62%
Portfolio turnover rate 189% 44% 75% 103% 41% 46%
Net assets at end of period (in 000's) $6,815 $10,879 $12,070 $10,054 $9,501 $9,403
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges. Class I is not subject to sales
charges.
(c) Total return is not annualized.
(d) The amount shown for a share outstanding does not correspond with aggregate net realized
and unrealized gain (loss) on investments due to significant redemptions of Class I
shares.
</Table>
16 MainStay Small Cap Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
- -------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
$ 13.06 $ 12.48 $ 14.80 $ 13.50 $ 10.70 $ 12.48
------- ------- ------- ------- ----------- ------------
0.07 (0.07) (0.14) (0.20) (0.15) (0.18)
(0.67) 1.58 0.65 2.00 2.95 (1.42)
------- ------- ------- ------- ----------- ------------
(0.60) 1.51 0.51 1.80 2.80 (1.60)
------- ------- ------- ------- ----------- ------------
(0.01) -- -- -- -- --
(1.26) (0.93) (2.83) (0.50) -- (0.18)
------- ------- ------- ------- ----------- ------------
(1.27) (0.93) (2.83) (0.50) -- (0.18)
------- ------- ------- ------- ----------- ------------
$ 11.19 $ 13.06 $ 12.48 $ 14.80 $ 13.50 $ 10.70
======= ======= ======= ======= =========== ============
(5.34%) 12.48% 2.67% 13.59% 26.17%(c) (12.83%)
0.57% (0.57%) (1.07%) (1.37%) (1.53%)+ (1.49%)
2.19% 2.15% 2.22% 2.45% 2.65%+ 2.62%
2.44% 2.40% 2.47% 2.53% 2.69%+ 2.62%
189% 44% 75% 103% 41% 46%
$28,197 $43,137 $63,611 $66,355 $60,384 $53,819
</Table>
<Table>
<Caption>
CLASS I
------------------------------------------------
FEBRUARY 16,
2005**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
2007 2006 2005
$14.30 $ 13.44 $ 14.01
------ ------- ------------
0.48 0.08 0.02
(1.05)(d) 1.71 (0.59)
------ ------- ------------
(0.57) 1.79 (0.57)
------ ------- ------------
(0.12) -- --
(1.26) (0.93) --
------ ------- ------------
(1.38) (0.93) --
------ ------- ------------
$12.35 $ 14.30 $ 13.44
====== ======= ============
(4.63%) 13.74% (4.07%)(c)
3.35% 0.56% 0.25% +
1.03% 1.05% 0.96% +
1.28% 1.30% 1.21% +
189% 44% 75%
$ 7 $25,394 $20,322
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 17
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises nineteen funds (collectively referred to as the
"Funds"). These financial statements and notes relate only to MainStay Small Cap
Value Fund (the "Fund"), a diversified fund.
The Fund currently offers four classes of shares. Class A shares and Class B
shares commenced on June 1, 1998. Class C shares commenced on September 1, 1998.
Class I shares commenced on February 16, 2005. Class A shares are offered at net
asset value per share plus an initial sales charge. No sales charge applies on
investments of $1 million or more (and certain other qualified purchases) in
Class A shares, but a contingent deferred sales charge is imposed on certain
redemptions of such shares within one year of the date of purchase. Class B
shares and Class C shares are offered without an initial sales charge, although
a declining contingent deferred sales charge may be imposed on redemptions made
within up to six years of purchase of Class B shares and a 1% contingent
deferred sales charge may be imposed on redemptions made within one year of
purchase of Class C shares. Class I shares are not subject to a sales charge. As
approved by the Board of Trustees in 1997, Class B shares convert to Class A
shares eight years after the date they were purchased. The four classes of
shares bear the same voting (except for issues that relate solely to one class),
dividend, liquidation and other rights and conditions except that Class B and
Class C shares are subject to higher distribution fee rates than Class A shares
under a distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I
shares are not subject to a distribution or service fee.
The Fund's investment objective is to seek long-term capital appreciation by
investing primarily in securities of small-capitalization companies.
Small-capitalization companies may be more volatile in price and have
significantly lower trading volumes than companies with larger capitalizations.
They may be more vulnerable to adverse business or market developments than
large-capitalization companies.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). Securities that are not traded on the valuation date are
valued at the mean of the latest quoted bid and asked prices. Prices normally
are taken from the principal market in which each security trades. Investments
in mutual funds are valued at their net asset value as of the close of the New
York Stock Exchange on the date of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: a security the trading for which has been
halted or suspended; a debt security that has recently gone into default and for
which there is not a current market quotation; a security of an issuer that has
entered into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; a security where the trading on that security's principal market
is temporarily closed at a time when, under normal conditions, it would be open.
At October 31, 2007, the Fund did not hold securities that were valued in such a
manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
of net investment income and distributions of net realized capital and currency
gains, if any, annually. All dividends and distributions are reinvested in
shares of the Fund, at net asset value, unless the shareholder elects otherwise.
Dividends and distributions to shareholders are determined in accordance with
federal income tax regulations and may differ from generally accepted accounting
principles in the United States of America. Permanent
18 MainStay Small Cap Value Fund
book/tax differences relating to income and gains are reclassified amongst
undistributed net investment income, accumulated net realized gain or loss and
paid-in-capital.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B) on
page 20) are allocated to separate classes of shares pro rata based upon their
relative net assets value on the date the expenses are incurred. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) SECURITIES LENDING. In order to realize additional income the Fund may lend
its securities to broker-dealers and financial institutions. The loans are
collateralized by cash or securities at least equal at all times to the market
value of the securities loaned. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. The Fund may bear
the risk of delay in recovery of, or loss of rights in, the securities loaned
should the borrower of the securities experience financial difficulty. The Fund
receives compensation for lending its securities in the form of fees or it
retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(H) INDEMNIFICATIONS. In the normal course of business, the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote.
However, there can be no assurance that material liabilities related to such
obligations will not arise in the future which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager") a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. NYLIM provides offices and conducts clerical, recordkeeping and
bookkeeping services, and is responsible for the financial and accounting
records required to be maintained by the Fund. NYLIM also pays the salaries and
expenses of all personnel affiliated with the Fund and all the operational
expenses that are not the responsibility of the Fund. MacKay Shields LLC (the
"Subadvisor"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life, serves as subadvisor to the Fund and is responsible
for the day-to-day portfolio management of the Fund. Pursuant to the terms of a
Subadvisory Agreement between NYLIM and the Subadvisor, NYLIM pays for the
services of the Subadvisor.
The Fund is contractually obligated to pay NYLIM a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.85% on assets up to $1.0 billion and 0.80% on assets in
excess of $1.0 billion. NYLIM has also contractually agreed to waive a portion
of its management fee so that the management fee is 0.60% on assets up to $1.0
billion and 0.55% on assets in excess of $1.0 billion.
Effective March 1, 2007, NYLIM has entered into a written expense limitation
agreement under which it has agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses (total annual operating expenses
excluding taxes, interest, litigation, extraordinary expenses, and brokerage and
other transaction expenses relating to the purchase or sale of portfolio
investments) do not exceed the following amounts of average daily net assets for
each class: Class A, 1.55%; Class B, 2.30%; Class C, 2.30%; and Class I, 1.24%.
This expense limitation may be modified or terminated only with the approval of
the Board of Trustees. NYLIM may recoup the amount of any management fee waivers
or expense reimbursements from the Fund pursuant to the
www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
agreement if such action does not cause the Fund to exceed existing expense
limitations and the recoupment is made within three years after the year in
which NYLIM incurred the expense.
For the year ended October 31, 2007, NYLIM earned fees from the Fund in the
amount of $859,258 and waived its fees in the amount of $252,723.
Prior to March 1, 2007, NYLIM had an agreement in place under which it had
agreed to waive a portion of the Fund's management fee or reimburse the expenses
of the Fund so that the Fund's total ordinary operating expenses did not exceed
1.55% of the Fund's average daily net assets for its Class A shares. NYLIM also
applied an equivalent waiver or reimbursement, in an equal amount of basis
points, to the other share classes of the Fund.
As of October 31, 2007, there is no amount of waived fees that are subject to
possible recoupment by the Manager.
State Street Bank & Trust Company ("SSBT"), One Lincoln Street, Boston,
Massachusetts, 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with NYLIM. These services include calculating
daily net asset values of the Fund, maintaining general ledger and sub-ledger
accounts for the calculation of the Fund's respective net asset values, and
assisting NYLIM in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, SSBT is compensated by
NYLIM.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, other than Class I shares, has adopted distribution plans
(the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940
Act.
Pursuant to the Class A Plan, the Distributor receives a monthly distribution
fee from the Fund at an annual rate of 0.25% of the average daily net assets of
the Fund's Class A shares, which is an expense of the Class A shares of the Fund
for distribution or service activities as designated by the Distributor.
Pursuant to the Class B and Class C Plans, the Fund pays the Distributor a
monthly distribution fee, which is an expense of the Class B and Class C shares
of the Fund, at the annual rate of 0.75% of the average daily net assets of the
Fund's Class B and Class C shares. The Plans provide that the Class B and Class
C shares of the Fund also incur a service fee at the annual rate of 0.25% of the
average daily net asset value of the Class B and Class C shares of the Fund.
Class I shares are not subject to a distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $19,269 for the year ended
October 31, 2007. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $370, $47,716 and $2,294, respectively, for the year ended October 31,
2007.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund, for the year ended October 31, 2007,
amounted to $360,116.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts, effective March 1, 2007. Shareholders with an account
balance of less than $1,000 are charged an annual per account fee of $20
(assessed semi-annually).
(F) CAPITAL. At October 31, 2007, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $ 339 0.0*%
- --------------------------------------------------------------------------------------
Class C 210 0.0*
- --------------------------------------------------------------------------------------
Class I 2,081 31.0
- --------------------------------------------------------------------------------------
</Table>
* Less than one-tenth of a percent.
(G) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2007, these fees, which are included in professional fees
shown on the Statement of Operations, were $3,690.
The Fund pays the Manager a monthly fee for certain pricing and recordkeeping
services provided under the Accounting Agreement at the annual rate of 1/20 of
1% for the first $20 million of average monthly net assets, 1/30 of 1% of the
next $80 million of average monthly net assets and 1/100 of 1% of any amount in
excess of $100 million of average monthly net assets. Fees for these services
provided to the Fund by the Manager amounted to $35,582 for the year ended
October 31, 2007.
20 MainStay Small Cap Value Fund
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2007 the components of accumulated gain/loss on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
CAPITAL AND OTHER UNREALIZED TOTAL
ORDINARY OTHER GAINS TEMPORARY APPRECIATION ACCUMULATED
INCOME (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$6,037,715 $9,604,584 $ -- $(9,268,353) $6,373,946
---------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized appreciation is
primarily due to real estate investment trust distributions.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income, accumulated net realized gain
on investments and additional paid-in-capital, arising from permanent
differences; net assets at October 31, 2007 are not affected.
<Table>
<Caption>
ACCUMULATED
ACCUMULATED NET REALIZED
NET INVESTMENT GAIN (LOSS) ON ADDITIONAL
INCOME (LOSS) INVESTMENTS PAID-IN-CAPITAL
$(47,422) $220,547 $ (173,125)
-------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to prior year net operating
losses that cannot be carried forward for federal income tax purposes and real
estate investment trusts distributions.
The tax character of distributions paid during the years ended October 31, 2007
and October 31, 2006, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2007 2006
Distributions paid from:
Ordinary Income $ 563,197 $ 4,082,368
Long-term Capital Gains 11,959,751 6,107,288
- -----------------------------------------------------------
$12,522,948 $10,189,656
- -----------------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
SSBT is the custodian of cash and securities of the Fund. Custodial fees are
charged to the Fund based on the market value of securities in the Fund and the
number of certain cash transactions incurred by the Fund.
NOTE 6--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. These funds pay a commitment fee, at an annual rate of .060% of the
average commitment amount, regardless of usage, to The Bank of New York, which
acts as agent to the syndicate. Such commitment fees are allocated among the
funds based upon net assets and other factors. Interest on any revolving credit
loan is charged based upon the Federal Funds Advances rate. There were no
borrowings made or outstanding on the line of credit during the year ended
October 31, 2007.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2007, purchases and sales of securities, other
than short-term securities, were $186,480 and $228,347, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 556 $ 7,376
Shares issued to shareholders in
reinvestment of dividends and
distributions 341 4,546
Shares redeemed (1,406) (18,527)
--------------------
Net decrease in shares outstanding
before conversion (509) (6,605)
Shares converted from Class B (See Note
1) 422 5,545
--------------------
Net decrease (87) $ (1,060)
====================
Year ended October 31, 2006:
Shares sold 1,174 $ 16,077
Shares issued to shareholders in
reinvestment of distributions 205 2,704
Shares redeemed (2,192) (29,946)
--------------------
Net increase (decrease) in shares
outstanding before conversion (813) (11,165)
Shares converted from Class B (See Note
1) 975 12,833
--------------------
Net increase 162 $ 1,668
====================
</Table>
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 239 $ 2,910
Shares issued to shareholders in
reinvestment of dividends and
distributions 318 3,867
Shares redeemed (881) (10,613)
--------------------
Net decrease in shares outstanding
before conversion (324) (3,836)
Shares reacquired upon conversion into
Class A (See Note 1) (460) (5,545)
--------------------
Net decrease (784) $ (9,381)
====================
Year ended October 31, 2006:
Shares sold 293 $ 3,728
Shares issued to shareholders in
reinvestment of distributions 357 4,373
Shares redeemed (1,392) (17,642)
--------------------
Net decrease in shares outstanding
before conversion (742) (9,541)
Shares reacquired upon conversion into
Class A (See Note 1) (1,053) (12,833)
--------------------
Net decrease (1,795) $(22,374)
====================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 87 $ 1,059
Shares issued to shareholders in
reinvestment of dividends and
distributions 63 774
Shares redeemed (374) (4,531)
-------------------
Net decrease (224) $(2,698)
===================
Year ended October 31, 2006:
Shares sold 175 $ 2,213
Shares issued to shareholders in
reinvestment of distributions 51 627
Shares redeemed (360) (4,561)
-------------------
Net decrease (134) $(1,721)
===================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 31 $ 441
Shares issued to shareholders in
reinvestment of dividends and
distributions 176 2,370
Shares redeemed (1,982) (26,584)
--------------------
Net decrease (1,775) $(23,773)
====================
Year ended October 31, 2006:
Shares sold 321 $ 4,435
Shares issued to shareholders in
reinvestment of distributions 107 1,421
Shares redeemed (164) (2,248)
--------------------
Net increase 264 $ 3,608
====================
</Table>
NOTE 9--OTHER MATTERS:
In 2004 the Securities and Exchange Commission ("SEC") raised concerns relating
to a guarantee provided to shareholders of the MainStay Equity Index Fund and
the fees and expenses of that Fund, as well as the related guaranteed disclosure
to that fund's shareholders. Discussions have been held with the SEC concerning
a possible resolution of this matter. There can be no assurance at this time as
to the outcome of these efforts.
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS:
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation becomes effective for the Fund's 2008 fiscal
year, and is to be applied to all open tax years as of the date of
effectiveness. Based on Management's analysis, the determination has been made
that the adoption of the interpretation on November 1, 2007, did not have an
impact on the Fund's financial statements upon adoption. Management continually
reviews the Fund's tax positions and such conclusions under the Interpretation
based on factors, including, but not limited to, ongoing analyses of tax laws,
regulations and interpretations, thereof.
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The changes to current generally accepted accounting
principles from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures
about fair value measurements. As of October 31, 2007, the Fund does not believe
the adoption of SFAS No. 157 will impact the amounts reported in the Fund's
financial statements. However, additional disclosures may be required about the
inputs used to develop the measurements and the effect of certain measurements
reported in the financial statements for a fiscal period.
22 MainStay Small Cap Value Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Small Cap Value Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2007, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years or periods in the four-year
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the periods presented through October 31,
2003, were audited by other auditors, whose report dated December 18, 2003,
expressed an unqualified opinion thereon.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2007, by correspondence with the custodian
and brokers or other appropriate auditing procedures where replies from brokers
were not received. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Small Cap Value Fund of The MainStay Funds as of October 31, 2007, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years or periods in the four-year period then ended,
in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 20, 2007
www.mainstayfunds.com 23
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS.
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with New York Life Investment Management LLC (the "Manager") and the
Subadvisory Agreement between the Manager and MacKay Shields LLC, a wholly-owned
indirect subsidiary of New York Life Investment Management Holdings LLC, an
affiliate of the Manager, (the "Subadvisor"), (each an "Agreement") at a meeting
held on May 22 and 23, 2007. In connection with the approval of each Agreement,
the Trustees reviewed a significant amount of a wide variety of information that
they had requested and received from the Manager and the Subadvisor, and data
and analysis from an outside data provider and a third party consultant. The
Trustees considered various industry trends and regulatory developments in their
deliberations. In considering approval of each Agreement, and in evaluating the
fairness of the compensation to be paid by the Fund, the Trustees met both as a
full Board and in executive session with no Interested Trustee present, in
advance of the meeting at which the Agreements were approved, and they
considered a number of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor, including with respect to the Fund's
emphasis on investing in small cap value stocks. The Trustees reviewed the
services that the Manager and the Subadvisor have provided historically to the
Fund, and also generally to other series of the Trust. Among other services, the
Manager's services have included investment management services, including
monitoring and evaluating the Subadvisor's investment program and investment
results with respect to the Fund, and the Subadvisor's compliance with the
Fund's investment policies and restrictions, and administrative services,
including working with other service providers of the Trust, maintaining certain
Fund records, providing office space, performing clerical and bookkeeping
services for the Fund, preparing Board materials and Fund filings, and otherwise
managing the Trust's operations. The Subadvisor is responsible for the
day-to-day portfolio management of the Fund, including determining the
composition of assets of the Fund and the timing of the Fund's execution of the
purchase and sale of assets, and its other services include, among other
services, providing reports to the Manager and reviewing certain aspects of Fund
filings. The Trustees considered, among other things, the Manager's and
Subadvisor's management, personnel, resources, operations and portfolio
management capabilities. The Board reviewed reports on the Subadvisor's
brokerage practices, including with respect to best execution of portfolio
trades. The Trustees considered the Manager's supervision of the Fund's service
providers and its attention to the compliance program of the Trust, the Manager,
the Subadvisor and certain other service providers, as well as the Subadvisor's
attention to its compliance program. The Trustees noted the generally favorable
results of a third party review of the services and communications that NYLIM
Service Company LLC, an affiliate of the Manager and the Subadvisor, has
provided to Trust shareholders.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's underperformance over
several time periods relative to groupings of funds having similar mandates.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information that indicated that the profitability to the Manager and its
affiliates from the overall relationship with the Trust was low, and, with
respect to the Fund in particular, the Manager and its affiliates were not
making a profit. The Trustees considered other benefits that the Manager and its
affiliates receive from the relationship with the Trust, including benefits that
NYLIFE Distributors and MainStay Shareholder Services receive in exchange for
services they provide to the Funds, and certain benefits from soft dollar
arrangements. The Trustees acknowledged certain benefits to the reputation of
the Manager and the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They considered that, across the Trust
(though not every series or share class), gross transfer agency fees tended to
be relatively high and, therefore, adversely affected gross expense ratios.
Noting that the Trust historically permitted smaller investor accounts, the
Trustees considered measures that had been recently implemented that were
intended to increase the average size of shareholder accounts, including
generally higher investment minimums, and small account fees, and the Trustees
considered potential benefits to the Manager and its affiliates arising from
such measures.
24 MainStay Small Cap Value Fund
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the Manager's willingness to implement a
contractual breakpoint that would reduce the Fund's management fee at asset
levels above the breakpoint, and the fact that the breakpoint was intended to
provide that shareholders would share in benefits from economies of scale
obtained through the growth in the Fund's assets. The Trustees noted that the
Fund not reached the asset level at which the breakpoint would reduce the Fund's
management fee rate. They also noted the Manager's willingness to waive and/or
reimburse contractually a portion of the Fund's expenses. The Trustees reviewed
information about the potential effect of asset growth on Fund expenses, the
difficulty of forecasting its effect on the profitability of the Manager and its
affiliates, and the management fee breakpoints applicable to the Fund and
certain other funds. It was noted that, to the extent the Fund's gross expenses
currently were higher than its net expenses, the reduction of the Fund's gross
expenses through the achievement of economies of scale might benefit the Manager
by reducing the expenses the Manager must reimburse to the Fund rather than
directly benefiting the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by the
Fund, the Trustees evaluated factors such as the fees and expenses borne by
other registered funds in the market pursuing strategies generally similar to
the Fund's. The Trustees considered that comparative data with respect to other
clients of the Manager or Subadvisor was not available as such clients did not
have similar investment mandates as the Fund. The Trustees considered the
current and proposed contractual and net management fees, its anticipated gross
and net expense ratio, and various components of the expense ratio, in
comparison to other funds in comparison groupings. The Trustees generally
acknowledged the historical relationships among the Manager, the Subadvisor and
the Trust and the likely difficulties in implementing an alternative to the
investment management arrangement between the Trust and the Manager. The
Trustees noted the Manager's agreement to continue to waive a certain portion of
its management fee and maintain the existing contractual limitation on the
Fund's net expenses.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings, with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. This summary set out
above describes the most important, but not all, of the factors considered by
the Trustees in considering each Agreement. On the basis of their review, a
majority of the Trustees and a majority of the Non-Interested Trustees concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the judgment of a
majority of the Trustees and a majority of the Non-Interested Trustees that
approval of each Agreement was in the best interests of the Fund and its
shareholders.
www.mainstayfunds.com 25
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advise shareholders within
60 days of the Fund's fiscal year end (October 31, 2007) as to the federal tax
status of dividends paid by the Fund during such fiscal year. Accordingly, the
Fund paid long-term capital gain distributions of $11,959,751.
The dividends paid by the Fund during the fiscal year ended October 31, 2007,
should be multiplied by 20.5% to arrive at the amount eligible for qualified
dividend income and 28.3% for the corporate dividends received deduction.
In January 2008, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2007. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2007.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
or (iii) on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 1-800-MAINSTAY (1-800-624-6782). You also can obtain and review copies
of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC
(information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330).
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of The MainStay Funds (the
"Trust") was held on May 4, 2007, at the offices of New York Life Investment
Management LLC in Parsippany, New Jersey. The purpose of the meeting was to
elect the following individuals to the Board of Trustees of the Trust:
- Susan B. Kerley
- Alan R. Latshaw
- Peter Meenan
- Richard H. Nolan, Jr.
- Richard S. Trutanic
- Roman L. Weil
- John A. Weisser
- Brian A. Murdock (Interested Trustee)
There are no other Trustees of the Trust.
No other business came before the special meeting. The proposal to elect
Trustees was passed by the shareholders of the Fund as shown below:
<Table>
<Caption>
SMALL CAP VOTES VOTES
VALUE FUND FOR WITHHELD ABSTENTIONS TOTAL
Susan B.
Kerley 4,026,059.164 16,977.069 5,514.000 4,048,550.233
- -------------------------------------------------------------------------
Alan R.
Latshaw 4,026,005.177 17,031.056 5,514.000 4,048,550.233
- -------------------------------------------------------------------------
Peter Meenan 4,026,059.164 16,977.069 5,514.000 4,048,550.233
- -------------------------------------------------------------------------
Richard H.
Nolan, Jr. 4,026,005.177 17,031.056 5,514.000 4,048,550.233
- -------------------------------------------------------------------------
Richard S.
Trutanic 4,026,005.177 17,031.056 5,514.000 4,048,550.233
- -------------------------------------------------------------------------
Roman L. Weil 4,026,059.164 16,977.069 5,514.000 4,048,550.233
- -------------------------------------------------------------------------
John A.
Weisser 4,026,005.177 17,031.056 5,514.000 4,048,550.233
- -------------------------------------------------------------------------
Brian A.
Murdock 4,026,005.177 17,031.056 5,514.000 4,048,550.233
- -------------------------------------------------------------------------
</Table>
This resulted in approval of the proposal.
26 MainStay Small Cap Value Fund
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Pursuant to
notice, a Special Meeting of Shareholders of the Trust was held on May 4, 2007,
at NYLIM's offices in Parsippany, New Jersey. The Trustees listed below were
elected to serve the Trust effective June 7, 2007.
Each Trustee serves until his or her successor is elected and qualified or until
his or her resignation, death or removal. The Retirement Policy provides that a
Trustee shall tender his or her resignation upon reaching age 72. A Trustee
reaching the age of 72 may continue for additional one-year periods with the
approval of the Board's Nominating and Governance Committee, except that no
Trustee shall serve on the Board past his or her 75th birthday. Officers serve a
term of one year and are elected annually by the Trustees. The business address
of each Trustee and officer listed below is 51 Madison Avenue, New York, New
York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF FUNDS
POSITION(S) HELD IN FUND COMPLEX
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
BRIAN A. MURDOCK Indefinite; Member of the Board of Managers 73 Trustee, Eclipse Funds since
3/14/56 Trustee and Chief and President (since 2004) and June, 2007 (3 funds); Director,
Executive Officer Chief Executive Officer (since Eclipse Funds Inc. since June
since 2006 2006), New York Life Investment 2007 (22 funds); Director,
Management LLC and New York MainStay VP Series Fund, Inc.,
Life Investment Management since 2006 (24 portfolios);
Holdings LLC; Senior Vice Director, ICAP Funds, Inc.,
President, New York Life since 2006 (3 funds)
Insurance Company (since 2004);
Chairman of the Board and
President, NYLIFE Distributors
LLC (since 2004); Member of the
Board of Managers, NYLCAP
Manager LLC and Madison Capital
Funding LLC (since 2004),
MacKay Shields LLC and
Institutional Capital LLC
(since 2006), and McMorgan &
Company LLC (since 2007); Chief
Executive Officer, Eclipse
Funds and Eclipse Funds Inc.
(since 2006); Chairman (2006 to
2007) and Director and Chief
Executive Officer (since 2006),
MainStay VP Series Fund, Inc.;
Director and Chief Executive
Officer, ICAP Funds, Inc.
(since 2006); Chief Investment
Officer, MLIM Europe and Asia
(2001 to 2003); President of
Merrill Japan and Chairman of
MLIM's Pacific Region (1999 to
2001)
-----------------------------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow Capital
Management, Inc., McMorgan & Company LLC, NYLIFE Securities Inc. and/or NYLIFE
Distributors LLC, as described in detail above in the column "Principal
Occupation(s) During Past Five Years."
www.mainstayfunds.com 27
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. KERLEY Indefinite; Partner, Strategic Management 73 Chairman since 2005 and Trustee
8/12/51 Chairman and Advisors LLC (since 1990) since 2000, Eclipse Funds (3
Trustee since funds); Chairman since 2005 and
June 2007 Director since 1990, Eclipse
Funds Inc. (22 funds); Chairman
and Director, ICAP Funds, Inc.,
since 2006 (3 funds); Chairman
and Director, MainStay VP
Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
Legg Mason Partners Funds,
Inc., since 1991 (30
portfolios)
----------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & Young 73 Trustee, Eclipse Funds since
3/27/51 Trustee and Audit LLP (2002 to 2003); Partner, June 2007 (3 funds); Director,
Committee Arthur Andersen LLP (1989 to Eclipse Funds Inc. since June
Financial Expert 2002); Consultant to the Audit 2007 (22 funds); Director, ICAP
since 2006 and Compliance Committee of The Funds, Inc., since June 2007 (3
MainStay Funds (2004 funds); Director, MainStay VP
to 2006) Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
State Farm Associates Funds
Trusts since 2005 (3
portfolios); Trustee, State
Farm Mutual Fund Trust since
2005 (15 portfolios); Trustee,
State Farm Variable Product
Trust since 2005 (9 portfolios)
----------------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds since
12/5/41 Trustee since President and Chief Executive 2002 (3 funds); Director,
June 2007 Officer, Babson-United, Inc. Eclipse Funds Inc. since 2002
(financial services firm) (2000 (22 funds); Director, ICAP
to 2004); Independent Funds, Inc.,
Consultant (1999 to 2000); Head since 2006 (3 funds); Director,
of Global Funds, Citicorp (1995 MainStay VP Series Fund, Inc.,
to 1999) since June 2007 (24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 73 Trustee, Eclipse Funds since
NOLAN, JR. Trustee since Management; President--Shields/ June 2007 (3 funds); Director,
11/16/46 June 2007 Alliance, Alliance Capital Eclipse Funds Inc. since June
Management (1994 to 2004) 2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 2006
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman (since 1990) and Chief 73 Trustee, Eclipse Funds since
TRUTANIC Trustee since Executive Officer (1990 to June 2007 (3 funds); Director,
2/13/52 1994 1999), Somerset Group Eclipse Funds Inc. since June
(financial advisory firm); 2007 (22 funds); Director, ICAP
Managing Director and Advisor, Funds, Inc., since June 2007 (3
The Carlyle Group (private funds); Director, MainStay VP
investment firm) (2002 to Series Fund, Inc., since June
2004); Senior Managing Director 2007 (24 portfolios)
and Partner, Groupe Arnault
S.A. (private investment firm)
(1999
to 2002)
----------------------------------------------------------------------------------------------------------------------
</Table>
28 MainStay Small Cap Value Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEE
ROMAN L. WEIL Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds since
5/22/40 Trustee and Audit Accounting, Graduate School of June 2007 (3 funds); Director,
Committee Business, University of Eclipse Funds Inc. since June
Financial Expert Chicago; President, Roman L. 2007 (22 funds); Director, ICAP
since June 2007 Weil Associates, Inc. Funds, Inc., since June 2007 (3
(consulting firm) funds); Director, MainStay VP
Series Fund, Inc., since 1994
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 73 Trustee, Eclipse Funds since
10/22/41 Trustee since Salomon Brothers, Inc. (1971 to June 2007 (3 funds); Director,
June 2007 1995) Eclipse Funds Inc. since June
2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 1997
(24 portfolios); Trustee,
Direxion Funds (69 funds) and
Direxion Insurance Trust (45
funds) since March 2007
----------------------------------------------------------------------------------------------------------------------
</Table>
Terry L. Lierman resigned as Trustee of the Trust effective May 31, 2007. Edward
J. Hogan, John B. McGuckian and Donald E. Nickelson resigned as Trustees of the
Trust effective June 7, 2007.
At a meeting of the Board of Trustees held on June 7 and 8, 2007, the following
individuals were appointed to serve as Officers of the Trust effective June 7,
2007:
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ROBERT A. Chief Legal Senior Managing Director, General Counsel and Secretary, New
ANSELMI Officer since York Life Investment Management LLC (including predecessor
10/19/46 2004 advisory organizations) (since 2000); Secretary (since 2001)
and General Counsel (since 2004), New York Life Investment
Management Holdings LLC; Senior Vice President, New York
Life Insurance Company (since 2000); Vice President and
Secretary, McMorgan & Company LLC (since 2001); Secretary,
NYLIM Service Company LLC (since 2005), NYLCAP Manager LLC
(since 2004), Madison Capital Funding LLC (since 2002), and
Institutional Capital LLC (since 2006); Chief Legal Officer,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), McMorgan Funds (since 2005) and
ICAP Funds, Inc. (since 2006); Managing Director and Senior
Counsel, Lehman Brothers Inc. (1998 to 1999); General
Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998)
-------------------------------------------------------------------------------------------------
JACK R. Treasurer and Managing Director, New York Life Investment Management LLC
BENINTENDE Principal (since June 2007); Treasurer and Principal Financial and
5/12/64 Financial and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
Accounting MainStay VP Series Fund, Inc., and ICAP Funds, Inc. (since
Officer since June 2007); Vice President, Prudential Investments (2000 to
June 2007 2007); Assistant Treasurer, JennisonDryden Family of Funds,
Target Portfolio Trust, The Prudential Series Fund and
American
Skandia Trust (2006 to 2007); Treasurer and Principal
Financial Officer, The Greater China
Fund (2007)
-------------------------------------------------------------------------------------------------
STEPHEN P. President since Senior Managing Director and Chief Marketing Officer, New
FISHER March 2007 York Life Investment Management LLC (since 2005); Managing
2/22/59 Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since March 2007); Managing Director, UBS
Global Asset Management (1999 to 2003)
-------------------------------------------------------------------------------------------------
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration predecessor advisory organizations) (since 2000); Executive
2/8/59 since 2005 Vice President, New York Life Trust Company (since 2006);
Vice President--Administration, Eclipse Funds, Eclipse Funds
Inc. and MainStay VP Series Fund, Inc. (since 2005) and ICAP
Funds, Inc. (since 2006)
-------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 29
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Senior Managing Director and Chief Compliance Officer (since
MICUCCI President and 2006) and Managing Director and Chief Compliance Officer
12/16/65 Chief Compliance (2003 to 2006), New York Life Investment Management LLC and
Officer since New York Life Investment Management Holdings LLC; Senior
2006 Managing Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE Distributors
LLC; Chief Compliance Officer, NYLCAP Manager LLC (since
2006); Senior Vice President and Chief Compliance Officer,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund,
Inc., and ICAP Funds, Inc. (since 2006); Vice President--
Compliance, Eclipse Funds, Eclipse Funds Inc. and MainStay
VP Series Fund, Inc. (2004 to 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002)
-------------------------------------------------------------------------------------------------
MARGUERITE E.H. Secretary since Managing Director and Associate General Counsel, New York
MORRISON* 2004 Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC (since
2005); Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP Funds,
Inc. (since 2006); Chief Legal Officer--Mutual Funds and
Vice President and Corporate Counsel, The Prudential
Insurance Company of America (2000 to 2004)
-------------------------------------------------------------------------------------------------
</Table>
* In addition to serving as Secretary to the Trust, effective January 1, 2008,
Marguerite E.H. Morrison will assume the role of Chief Legal Officer to the
Trust.
Arphiela Arizmendi resigned as Treasurer and Principal Financial and Accounting
Officer of the Trust effective June 7, 2007.
Christopher O. Blunt resigned as President of the Trust effective March 12,
2007.
Alan J. Kirshenbaum resigned as Senior Vice President of the Trust effective
March 19, 2007.
30 MainStay Small Cap Value Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay 130/30 Core Fund
MainStay 130/30 Growth Fund
MainStay All Cap Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay 130/30 High Yield Fund(2)
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay 130/30 International Fund
MainStay Global High Income Fund
MainStay ICAP International Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
RETIREMENT FUNDS
MainStay Retirement 2010 Fund
MainStay Retirement 2020 Fund
MainStay Retirement 2030 Fund
MainStay Retirement 2040 Fund
MainStay Retirement 2050 Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
New York, New York
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
Chicago, Illinois
MACKAY SHIELDS LLC(3)
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
MCMORGAN & COMPANY LLC(3)
San Francisco, California
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
(NEW YORK LIFE INVESTMENT MANAGEMENT LLC LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2007 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO11872 (RECYCLE LOGO) MS329-07 MSSV11-12/07
25
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
TAX FREE BOND FUND
Message from the President
and
Annual Report
October 31, 2007
MESSAGE FROM
THE PRESIDENT
The 12-month period ended October 31, 2007, was a dynamic one for mutual fund
investors. U.S. equity markets generally advanced, with growth stocks out-
performing value stocks at all capitalization levels. Although past performance
is no guarantee of future results, international stocks as a whole provided even
stronger returns for U.S. investors.
The progress of the equity markets, however, was far from steady. In February,
weakness in Asian markets led to sharp price declines around the globe. The
correction caused many investors to reconsider whether China and other emerging
economies could sustain their rapid growth. Fortunately, strong
corporate-earnings reports and positive economic news helped the stock market
regain its footing.
In July and August, difficulties in the subprime-mortgage market led to another
stock-market correction. A number of high-profile mortgage originators either
closed their doors or were sold to larger entities. Other leading financial
services firms faced major write-offs because of subprime-mortgage exposure.
The Federal Open Market Committee (FOMC) took prompt action to increase
liquidity and stabilize the financial markets by lowering the discount rate and
the federal funds target rate during the reporting period. These Federal Reserve
moves helped calm investor concerns, and the stock market generally advanced
from August 16, 2007, the date of an unscheduled FOMC meeting, through the end
of October 2007.
Difficulties in the subprime-mortgage market led to a "flight to quality," or a
general movement toward fixed-income securities that carry lower risk. As demand
for short- and intermediate-term Treasury securities increased, yields fell
across much of the maturity spectrum. Yields rose, however, on 20-and 30-year
Treasury bonds, and the yield curve steepened during the 12-month reporting
period.
High-yield bonds rallied from November 2006 through May 2007. But in June and
July, the yield differences--or spreads--between high-yield bonds and comparable
Treasury securities began to widen. At the end of October 2007, these spreads
were wider than when the reporting period began, making high-yield securities
more attractive to investors willing to accept higher risk.
To help investors address the challenges of today's ever-changing markets, New
York Life Investment Management LLC provides access to seven institutional
investment boutiques, each with its own proprietary research and investment
culture. As advisors and subadvisors to MainStay Funds, these boutiques bring a
wealth of experience and market insight to our shareholders. The portfolio
managers of each MainStay Fund seek to consistently apply time-tested investment
principles across a wide variety of market environments.
The report that follows provides more specific information about the market
forces and investment decisions that affected your investment in MainStay Funds
from November 1, 2006, through October 31, 2007. Please read the report
carefully. As you do, bear in mind that this annual report reflects just a short
segment of your lifetime investment journey. We look forward to continuing to
work with you, wherever that journey may lead.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
TAX FREE BOND FUND
MainStay Funds
Annual Report
October 31, 2007
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 15
- --------------------------------------------------------------------------------
Notes to Financial Statements 20
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 26
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 27
- --------------------------------------------------------------------------------
Federal Income Tax Information 29
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 29
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 29
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 29
- --------------------------------------------------------------------------------
Trustees and Officers 30
</Table>
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT
MONTH-END PERFORMANCE INFORMATION, PLEASE CALL 1-800-MAINSTAY (1-800-624-6782)
OR VISIT WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES--MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------------------------------------------
With sales charges -3.43% 2.17% 3.29%
Excluding sales charges 1.12 3.12 3.76
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
LEHMAN BROTHERS MUNICIPAL
MAINSTAY TAX FREE BOND FUND BOND INDEX
--------------------------- -------------------------
10/31/97 9550 10000
10197 10802
9537 10610
10320 11513
11383 12723
11851 13469
12163 14158
12735 15012
12961 15393
13664 16278
10/31/07 13817 16751
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------------------------------------------
With sales charges -4.00% 2.51% 3.50%
Excluding sales charges 0.86 2.86 3.50
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
LEHMAN BROTHERS MUNICIPAL
MAINSTAY TAX FREE BOND FUND BOND INDEX
--------------------------- -------------------------
10/31/97 10000 10000
10655 10802
9941 10610
10721 11513
11797 12723
12249 13469
12540 14158
13110 15012
13295 15393
13982 16278
10/31/07 14102 16751
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------------------------------------------
With sales charges -0.11% 2.86% 3.50%
Excluding sales charges 0.86 2.86 3.50
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
LEHMAN BROTHERS MUNICIPAL
MAINSTAY TAX FREE BOND FUND BOND INDEX
--------------------------- -------------------------
10/31/97 10000 10000
10655 10802
9941 10610
10721 11513
11797 12723
12249 13469
12540 14158
13110 15012
13295 15393
13982 16278
10/31/07 14102 16751
</Table>
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect maximum applicable sales charges explained in this paragraph, change in
share price, and reinvestment of dividend and capital-gain distributions. The
graphs assume an initial investment of $10,000 and reflect the deduction of all
sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 4.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase and have an annual 12b-1 fee of 0.5%. Class C shares
are sold with no initial sales charge, are subject to a CDSC of 1% if redeemed
within one year of purchase and have an annual 12b-1 fee of 0.5%. Performance
figures reflect certain fee waivers and/or expense limitations, without which
total returns may have been lower. These fee waivers and/or expense limitations
are contractual and may be modified or terminated only with the approval of the
Board of Trustees. The Manager may recoup the amount of certain management fee
waivers or expense reimbursements from the Fund pursuant to the contract if such
action does not cause the Fund to exceed existing expense limitations and the
recoupment is made within three years after the year in which the Manager
incurred the expense. Prior to 9/1/98, performance for Class C shares includes
the historical performance of Class B shares adjusted to reflect the applicable
sales charge (or CDSC), fees, estimated expenses and fee waivers/expense
limitations of Class C shares upon initial offer. Unadjusted, the performance
shown for the newer class of shares might have been lower.
THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS AND
SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- ------------------------------------------------------------------------------
Lehman Brothers(R) Municipal Bond Index(1) 2.91% 4.46% 5.29%
Average Lipper general municipal debt fund(2) 1.47 3.83 4.29
</Table>
1. The Lehman Brothers(R) Municipal Bond Index is an unmanaged index that
consists of approximately 15,000 municipal bonds that are rated Baa or better
by Moody's and have a maturity of at least two years. Bonds subject to the
Alternative Minimum Tax or with floating or zero coupons are excluded.
Results assume reinvestment of all income and capital gains. The Lehman
Brothers(R) Municipal Bond Index is considered to be the Fund's broad-based
securities-market index for comparison purposes. An investment cannot be made
directly in an index.
2. Lipper Inc. is an independent monitor of fund performance. Results are based
on total returns with all dividend and capital-gain distributions reinvested.
THE DISCLOSURE ON THE PRECEDING PAGE IS AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Tax Free Bond Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY TAX FREE BOND FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2007, to October 31, 2007,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1,
2007, to October 31, 2007.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six-months ended October 31, 2007. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/07 10/31/07 PERIOD(1) 10/31/07 PERIOD(1)
CLASS A SHARES $1,000.00 $994.85 $4.48 $1,020.55 $4.53
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $993.60 $5.73 $1,019.30 $5.80
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $993.60 $5.73 $1,019.30 $5.80
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's net annualized expense ratio of each class
(0.89% for Class A and 1.14% for Class B and Class C) multiplied by the
average account value over the period, divided by 365 and multiplied by 184
(to reflect the one-half year period).
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2007
(PIE CHART)
<Table>
Long-Term Municipal Bonds 95.2
Short-Term Investments 3.5
Cash and Other Assets, Less Liabilities 1.3
Futures Contracts 0.0*
</Table>
* Less than one-tenth of a percent.
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2007 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. California State Office of the State Treasurer,
5.00%, due 8/1/25
2. Puerto Rico Public Buildings Authority Revenue
Guaranteed Government Facilities, Series I,
5.00%, due 7/1/36
3. Golden State Tobacco Securitization Corp.,
5.00%, due 6/1/45
4. Buckeye, Ohio, Tobacco Settlement Financing
Authority, 5.75%, due 6/1/34
5. North Carolina Municipal Power Agency N1,
Catawba Electric Revenue, Series B, 6.50%, due
1/1/20
6. Chicago, Illinois Housing Authority Capital
Program Revenue, Insured: FSA, 5.00%, due 7/1/23
7. Illinois State Toll Highway Authority, Series
A-1, Insured: FSA, 5.00%, due 1/1/26
8. Seattle, Washington Municipal Light & Power
Revenue, 6.00%, due 10/1/15
9. Los Angeles, California Unified School District,
Series D, Insured: MBIA, 5.75%, due 7/1/16
10. Houston Texas Airport System Revenue, Series B,
Insured: FGIC, 5.00%, due 7/1/32
</Table>
8 MainStay Tax Free Bond Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers John Fitzgerald, CFA, and Laurie
Walters, CFA, of MacKay Shields LLC
HOW DID MAINSTAY TAX FREE BOND FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2007?
Excluding all sales charges, MainStay Tax Free Bond Fund returned 1.12% for
Class A shares, 0.86% for Class B shares and 0.86% for Class C shares for the 12
months ended October 31, 2007. All share classes underperformed the 1.47% return
of the average Lipper(1) general municipal debt fund and the 2.91% return of the
Lehman Brothers(R) Municipal Bond Index(2) for the 12 months ended October 31,
2007. The Lehman Brothers(R) Municipal Bond Index is the Fund's broad-based
securities-market index. See page 5 for Fund returns with sales charges.
WHAT FACTORS IN THE MUNICIPAL BOND MARKET AFFECTED THE FUND DURING THE 12-MONTH
REPORTING PERIOD?
Yields on shorter-term municipal bonds fell during the reporting period, while
yields on longer-term municipal bonds rose, causing the municipal yield curve to
steepen. At the long end, higher yields suggested that investors buying duration
were demanding higher compensation to offset rising inflation. At the short end,
lower yields suggested that investors were trying to anticipate Federal Open
Market Committee cuts in the targeted federal funds rate. Credit dislocations
over the summer caused active buyers of longer-maturity municipals, such as
hedge funds and foreign banks, to reduce their exposure to the market. All told,
the spread, or yield differential, between two-year and 30-year municipal bonds
widened by 50 basis points to 110 basis points by the end of October 2007. (A
basis point is one-hundredth of a percentage point.)
During the reporting period, municipal bond issuance surged to a record $428
billion, an increase
of 16.9% over the prior fiscal year. Relatively low interest rates gave issuers
a strong incentive to
come to market.
WHAT WAS THE FUND'S DURATION STRATEGY DURING THE REPORTING PERIOD?
Although tactical duration adjustments during the first half of the reporting
period were helpful, the Fund's overall duration strategy detracted from
performance. In December and January, the Fund's shorter duration relative to
the Lehman Brothers(R) Municipal Bond Index was helpful as interest rates rose.
In February, a modestly longer-than-benchmark duration was beneficial as
interest rates fell. A shorter-than-benchmark duration during August and
September, however, detracted from performance, as investors pursued
higher-quality securities for longer than we anticipated. Because the market
appeared overextended, the Fund ended the reporting period with a duration that
was modestly shorter than that of the Lehman Brothers(R) Municipal Bond Index.
WHAT POSITIONING DECISIONS AFFECTED THE FUND'S PERFORMANCE?
The Fund emphasized longer-maturity municipal bonds, which underperformed
shorter-maturity issues, so the Fund's yield-curve positioning detracted from
performance. During the reporting period, we reduced exposure to five-year
maturities in favor of 15-year and longer maturities for their incremental yield
and greater performance potential.
The Fund's position in Tennessee Energy Acquisition gas-prepay bonds backed by
Goldman Sachs counterparty ratings detracted from the Fund's performance. Credit
spreads widened in this sector, as investors grew increasingly concerned that
credit deterioration in subprime mortgages would have a negative impact on
brokerage earnings. Since we had confidence that Goldman Sachs remained
financially sound, the Fund continued to hold the Tennessee bonds.
On the positive side, the Fund benefited from issue selection. Exposure to
several higher-coupon callable bonds that were prerefunded during the reporting
period boosted the Fund's returns.(3)
WERE THERE SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
We sought to add incremental yield in sectors such as health care that offered
appropriate compensation for any additional risk. We purchased a Hillsborough,
Florida, issue for the expansion of Tampa General Hospital. The hospital has
been consistently profitable and serves a growing area.
Funds that invest in bonds are subject to interest rate, credit and inflation
risk and can lose principal value when interest rates rise. A portion of income
may be subject to state and local taxes or the alternative minimum tax. The Fund
may invest in derivatives, which may increase the volatility of the Fund's net
asset value and may result in a loss to the Fund. The Fund may experience a
portfolio turnover rate of more than 100% and may generate taxable short-term
capital gains.
1. See footnote on page 6 for more information on Lipper Inc.
2. See footnote on page 6 for more information on the Lehman Brothers(R)
Municipal Bond Index.
www.mainstayfunds.com 9
We added California State general obligations that offered a concession to the
market because of a multibillion dollar issuance. We also increased the Fund's
holdings in tobacco-settlement bonds as risk premiums aligned more closely with
foreseeable legal risks. In October, we added Buckeye, Ohio, Tobacco Settlement
bonds to the Fund. This asset-backed security receives payments from tobacco
manufacturers based upon their Master Settlement Agreement with the majority of
state attorneys general. Risk premiums widened to accommodate the $5.5 billion
offering, the largest tobacco-settlement issue to date.
We reduced exposure to industrial development bonds, water and sewer bonds and
prerefunded issues because they offered little in terms of incremental yield in
comparison with other credits. We also selectively reduced the Fund's exposure
to issues from Massachusetts, New York and Pennsylvania when relatively low
supply in these states made the bonds attractive sale candidates. We also
reduced the Fund's exposure to issues from New York City, as risk premiums were
narrow and we were concerned that difficulties in the financial markets could
affect anticipated revenues.
We sold the Fund's position in Charter Mac Equity Issuer Trust because credit
spreads had narrowed and we were concerned about the company's increased
leverage.
Early in the reporting period, we liquidated the Fund's position in Main Street,
Georgia Natural Gas backed by Merrill Lynch's counterparty rating, since Merrill
Lynch had expanded more aggressively into the subprime mortgage area with the
acquisition of First Franklin Financials. The Fund had no direct exposure to
subprime residential mortgages and the impact of the shakeout in subprime
lending on the Fund's performance during the reporting period was minimal.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2007, the Fund was overweight relative to the Lehman
Brothers(R) Municipal Bond Index in education, health care and transportation
bonds. As of the same date, the Fund was underweight in prerefunded bonds,
electric bonds and lease revenue bonds and neutrally weighted in
tobacco-settlement bonds.
3. Prerefunding or advance refunding is a procedure in which a bond issuer
floats a second bond at a lower interest rate and the proceeds from the sale
of the second bond are safely invested, usually in Treasury securities,
which, in turn, are held in escrow collateralizing the first bond. Given that
the advance refunded bonds become, essentially, fully tax-exempt U.S.
Treasury securities and no longer represent the credit risk profile of the
original borrower, they often increase in value--sometimes significantly.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecast
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
10 MainStay Tax Free Bond Fund
PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2007
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM MUNICIPAL BONDS (95.2%)+
- ------------------------------------------------------------------------------
ALABAMA (0.4%)
Huntsville, Alabama Health Care Authority
Series A, LOC: Regions Bank
5.00%, due 6/1/34 (a) $ 1,000,000 $ 1,005,170
------------
ARIZONA (0.7%)
Arizona Health Facilities Authority Revenue,
Banner Health
Series A
5.00%, due 1/1/19 1,500,000 1,560,883
------------
CALIFORNIA (12.8%)
California State Economic Recovery
Series A
5.00%, due 7/1/17 2,000,000 2,096,680
V California State Office of the
State Treasurer
5.00%, due 8/1/25 (b) 10,000,000 10,278,900
California State Various Purposes
5.25%, due 4/1/34 5,000 5,205
V Golden State Tobacco Securitization Corp.
5.00%, due 6/1/45 10,000,000 10,034,000
V Los Angeles, California Unified
School District
Series D, Insured: MBIA
5.75%, due 7/1/16 (c) 6,000,000 6,866,280
------------
29,281,065
------------
DELAWARE (1.0%)
Delaware State Economic Development Authority
Revenue Pollution Control,
Delmarva Power
Series C, Insured: AMBAC
4.90%, due 5/1/26 (d) 2,250,000 2,336,760
------------
FLORIDA (8.3%)
Highlands County Florida Health Facilities
Authority Revenue Hospital,
Adventist Health Systems
Series D
5.375%, due 11/15/35 (b) 5,000,000 5,450,850
Hillsborough County Florida Industrial Development
Authority Hospital Revenue, Tampa General
Hospital Project
5.25%, due 10/1/41 6,000,000 6,046,440
Miami-Dade County Florida Solid Waste System
Revenue, Insured: MBIA
5.00%, due 10/1/19 (c) 1,735,000 1,832,993
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FLORIDA (CONTINUED)
South Florida Water Management District
Insured: AMBAC
5.00%, due 10/1/20 (d) $ 5,245,000 $ 5,532,269
------------
18,862,552
------------
ILLINOIS (12.5%)
V Chicago, Illinois Housing Authority Capital
Program Revenue, Insured: FSA
5.00%, due 7/1/23 (b)(e) 7,100,000 7,411,619
Chicago, Illinois Waterworks Revenue, Insured:
FGIC
6.50%, due 11/1/15 (f) 3,005,000 3,555,185
Illinois Health Facilities Authority Revenue, Lake
Forest Hospital
Series A
5.75%, due 7/1/29 2,000,000 2,073,800
Illinois State Sales Tax Revenue Second Series,
Insured: FGIC
5.50%, due 6/15/17 (f) 4,000,000 4,483,960
V Illinois State Toll Highway Authority
Series A-1, Insured: FSA
5.00%, due 1/1/26 (b)(e) 7,000,000 7,327,740
Kane McHenry Cook & De Kalb Counties Illinois Unit
School District No. 300,
Insured: XLCA
5.00%, due 12/1/20 (g) 3,500,000 3,693,795
------------
28,546,099
------------
KANSAS (1.1%)
Geary County Kansas Unified School District No.
475, Insured: MBIA
5.25%, due 9/1/22 (c) 2,275,000 2,515,217
------------
LOUISIANA (1.8%)
State of Louisiana Offshore Terminal Authority
Deepwater Port Revenue
Series C
5.25%, due 9/1/16 3,970,000 4,190,176
------------
MASSACHUSETTS (1.0%)
Massachusetts Bay Transportation Authority Revenue
Assessment
Series A
5.75%, due 7/1/18 (h) 210,000 221,754
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM MUNICIPAL BONDS (CONTINUED)
- ------------------------------------------------------------------------------
MASSACHUSETTS (CONTINUED)
xMassachusetts State Health & Educational
Facilities Authority Revenue,
Partners Healthcare System
Series G-5
5.00%, due 7/1/27 $ 2,000,000 $ 2,039,040
------------
2,260,794
------------
NEBRASKA (0.1%)
Nebraska Investment Finance Authority, Single
Family Housing Revenue
Series C
6.30%, due 9/1/28 (i) 145,000 146,525
------------
NEVADA (1.8%)
Clark County Nevada Passenger Facility Charge
Revenue, Las Vegas-McCarran
International Airport
Series A-2, Insured: AMBAC
5.00%, due 7/1/26 (d) 4,000,000 4,175,880
------------
NEW JERSEY (1.9%)
New Jersey State Trust Fund Transportation
Authority System
Series C, Insured: FSA
5.50%, due 12/15/17 (b)(e) 3,810,000 4,293,870
------------
NEW MEXICO (1.3%)
New Mexico Finance Authority State Transportation
Revenue
Series A, Insured: MBIA
5.00%, due 6/15/22 (c) 2,750,000 2,896,218
------------
NEW YORK (11.0%)
Liberty, New York Development Corp., Goldman Sachs
Group, Inc.
5.25%, due 10/1/35 5,000,000 5,323,850
Metropolitan Transportation Authority of New York
Revenue
Series B, Insured: MBIA
5.00%, due 11/15/25 (c) 2,000,000 2,106,200
New York City Industrial Development Agency
Revenue Queens Baseball Stadium Insured: AMBAC
5.00%, due 1/1/20 (d) 250,000 266,345
New York City Industrial Development Agency
Revenue Yankee Stadium
Insured: FGIC
5.00%, due 3/1/31 (f) 1,000,000 1,037,900
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
NEW YORK (CONTINUED)
New York State Dormitory Authority
Lease Revenue Court Facilities
City of New York
7.375%, due 5/15/10 $ 2,575,000 $ 2,722,007
7.50%, due 5/15/11 1,740,000 1,872,553
New York State Dormitory Authority Revenue
Series A, Insured: MBIA
6.00%, due 7/1/19 (c) 3,700,000 4,352,125
Series B
7.50%, due 5/15/11 (h) 1,645,000 1,805,256
New York State Dormitory Authority Revenue, North
Shore University Hospital
5.00%, due 5/1/32 1,185,000 1,191,683
New York State Environmental Facilities Corp.
Pollution Control Revenue, State
Water Revolving Fund
Series A
7.50%, due 6/15/12 135,000 140,756
New York State Thruway Authority Highway & Bridge
Trust Fund
Series B, Insured: AMBAC
5.00%, due 4/1/21 (d) 4,000,000 4,227,280
------------
25,045,955
------------
NORTH CAROLINA (5.8%)
North Carolina Eastern Municipal Power Agency
Systems Revenue
Series A
5.50%, due 1/1/12 2,000,000 2,111,620
Series D
6.75%, due 1/1/26 2,000,000 2,119,060
North Carolina Housing Finance Agency Home
Ownership
Series 13-A
4.25%, due 1/1/28 (i) 1,505,000 1,507,258
V North Carolina Municipal Power Agency N1,
Catawba Electric Revenue
Series B
6.50%, due 1/1/20 (b) 7,000,000 7,430,290
------------
13,168,228
------------
OHIO (5.2%)
V Buckeye, Ohio, Tobacco Settlement Financing
Authority
5.75%, due 6/1/34 9,750,000 9,408,750
Lorain County Ohio Hospital Revenue, Catholic
Healthcare
5.375%, due 10/1/30 2,300,000 2,367,850
------------
11,776,600
------------
</Table>
12 MainStay Tax Free Bond Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM MUNICIPAL BONDS (CONTINUED)
- ------------------------------------------------------------------------------
x
PUERTO RICO (5.6%)
Puerto Rico Commonwealth Infrastructure Financing
Special Authority
Series A
5.50%, due 10/1/17 $ 1,500,000 $ 1,596,435
V Puerto Rico Public Buildings
Authority Revenue
Guaranteed Government Facilities
Series I
5.00%, due 7/1/36 10,000,000 10,075,400
University of Puerto Rico Revenues
Series P
5.00%, due 6/1/30 1,000,000 1,017,770
------------
12,689,605
------------
SOUTH CAROLINA (2.0%)
South Carolina Jobs Economic Development Authority
Revenue, Bon Secours Health Systems, Inc.
5.625%, due 11/15/30 (b) 4,500,000 4,641,975
------------
TENNESSEE (2.2%)
Tennessee Energy Acquisition Corp., Gas Revenue
Series A
5.25%, due 9/1/24 5,000,000 5,069,550
------------
TEXAS (15.0%)
Dallas Fort Worth Texas International Airport
Facilities Improvement Revenue
Series A, Insured: FGIC
6.00%, due 11/1/28 (b)(f)(i) 4,000,000 4,147,240
Dallas, Texas Area Rapid Transit Sales Tax Revenue
Insured: AMBAC
5.00%, due 12/1/16 (d) 1,500,000 1,624,785
El Paso, Texas
Insured: FGIC
5.00%, due 8/15/19 (f) 3,815,000 4,084,568
Gainesville, Texas Independent School District,
Insured: PSFG
5.00%, due 2/15/32 (j) 1,000,000 1,029,670
5.25%, due 2/15/36 (j) 2,925,000 3,070,022
V Houston Texas Airport System Revenue
Series B, Insured: FGIC
5.00%, due 7/1/32 (f) 6,250,000 6,460,188
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TEXAS (CONTINUED)
Jefferson County Texas Health Facility Development
Corp., Texas Baptist
Hospitals, Insured: AMBAC
5.20%, due 8/15/21 (d) $ 1,085,000 $ 1,125,416
San Antonio, Texas Electric & Gas
Series 2000
5.00%, due 2/1/17 (b) 5,040,000 5,398,798
Tarrant Regional Water District Texas Water
Revenue, Insured: FSA
5.25%, due 3/1/17 (e) 2,500,000 2,667,175
Texas State College Student Loan
5.50%, due 8/1/10 (i) 1,760,000 1,844,357
Texas State Transportation Commission
5.00%, due 4/1/16 2,500,000 2,697,475
------------
34,149,694
------------
WASHINGTON (3.0%)
V Seattle, Washington Municipal Light & Power
Revenue
6.00%, due 10/1/15 (b)(h) 6,500,000 6,868,615
------------
WEST VIRGINIA (0.7%)
Kanawha Mercer Nicholas Counties West Virginia
Single Family Mortgage Revenue
(zero coupon), due 2/1/15 (h) 2,230,000 1,561,335
------------
Total Long-Term Municipal Bonds
(Cost $211,787,115) 217,042,766
------------
SHORT-TERM INVESTMENTS (3.5%)
- ------------------------------------------------------------------------------
WYOMING (3.5%)
Lincoln County Wyoming Pollution Control Revenue,
ExxonMobil Corp.
Series C
3.64%, due 11/1/14 (k) 6,895,000 6,895,000
Series D
3.78%, due 11/1/14 (k) 1,025,000 1,025,000
------------
Total Short-Term Investments
(Cost $7,920,000) 7,920,000
------------
Total Investments
(Cost $219,707,115) 98.7% 224,962,766(m)
Cash and Other Assets,
Less Liabilities 1.3 2,920,702
----------- ------------
Net Assets 100.0% $227,883,468
=========== ============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
CONTRACTS UNREALIZED
SHORT DEPRECIATION (L)
FUTURES CONTRACTS (0.0%)++
- -----------------------------------------------------------------------------
United States Treasury Note
December 2007 (10 Year) (250) $ (83,981)
-------------------
Total Futures Contracts
(Settlement Value $27,503,906) $ (83,981)
===================
</Table>
<Table>
+++ All of the Fund's assets are maintained to cover "senior
securities transactions" which may include, but are not
limited to, forwards, TBA's, options and futures. These
securities are marked-to-market daily and reviewed against
the value of the Fund's "senior securities" holdings to
ensure proper coverage for these transactions.
++ Less than one-tenth of a percent.
(a) LOC--Letter of Credit
(b) Segregated as collateral for futures contracts.
(c) MBIA--MBIA Insurance Corp.
(d) AMBAC--Ambac Assurance Corp.
(e) FSA--Financial Security Assurance, Inc.
(f) FGIC--Financial Guaranty Insurance Co.
(g) XLCA--XL Capital Assurance, Inc.
(h) Prerefunding Security--issuer has or will issue new bonds
and use the proceeds to purchase Treasury securities that
mature at or near the same date as the original issue's call
date.
(i) Interest on these securities is subject to alternative
minimum tax.
(j) PSFG--Permanent School Fund Guaranteed
(k) Variable rate securities that may be tendered back to the
issuer at any time prior to maturity at par. Rate shown is
the rate in effect at October 31, 2007.
(l) Represents the difference between the value of the contracts
at the time they were opened and the value at October 31,
2007.
(m) At October 31, 2007, cost is $219,707,115 for federal income
tax purposes and net unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 6,636,151
Gross unrealized depreciation (1,380,500)
-----------
Net unrealized appreciation $ 5,255,651
===========
</Table>
14 MainStay Tax Free Bond Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2007
<Table>
ASSETS:
Investment in securities, at value (identified
cost $219,707,115) $224,962,766
Cash 19,632
Receivables:
Interest 3,173,830
Variation margin on futures contracts 160,156
Fund shares sold 68,600
Other assets 13,239
-------------
Total assets 228,398,223
-------------
LIABILITIES:
Payables:
Manager (See Note 3) 90,282
NYLIFE Distributors (See Note 3) 60,618
Shareholder communication 44,081
Transfer agent (See Note 3) 36,932
Fund shares redeemed 26,110
Professional fees 16,707
Custodian 8,092
Trustees 3,307
Accrued expenses 3,260
Dividend payable 225,366
-------------
Total liabilities 514,755
-------------
Net assets $227,883,468
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized $ 240,352
Additional paid-in capital 246,516,979
-------------
246,757,331
Accumulated distributions in excess of net
investment income (80,939)
Accumulated net realized loss on investments
and futures transactions (23,964,594)
Net unrealized appreciation on investments and
futures contracts 5,171,670
-------------
Net assets $227,883,468
=============
CLASS A
Net assets applicable to outstanding shares $189,210,489
=============
Shares of beneficial interest outstanding 19,955,724
=============
Net asset value per share outstanding $ 9.48
Maximum sales charge (4.50% of offering price) 0.45
-------------
Maximum offering price per share outstanding $ 9.93
=============
CLASS B
Net assets applicable to outstanding shares $ 31,920,875
=============
Shares of beneficial interest outstanding 3,367,326
=============
Net asset value and offering price per share
outstanding $ 9.48
=============
CLASS C
Net assets applicable to outstanding shares $ 6,752,104
=============
Shares of beneficial interest outstanding 712,155
=============
Net asset value and offering price per share
outstanding $ 9.48
=============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 15
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2007
<Table>
INVESTMENT INCOME:
INCOME:
Interest $11,549,934
------------
EXPENSES:
Manager (See Note 3) 1,452,082
Distribution/Service--Class A (See Note 3) 491,551
Service--Class B (See Note 3) 97,448
Service--Class C (See Note 3) 16,038
Transfer agent (See Note 3) 229,361
Distribution--Class B (See Note 3) 97,448
Distribution--Class C (See Note 3) 16,038
Professional fees 71,625
Shareholder communication 51,678
Recordkeeping 50,868
Registration 45,453
Custodian 27,278
Trustees 14,119
Miscellaneous 11,791
------------
Total expenses before waiver/reimbursement 2,672,778
Expense waiver/reimbursement from Manager
(See Note 3) (405,365)
------------
Net expenses 2,267,413
------------
Net investment income 9,282,521
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FUTURES TRANSACTIONS:
Net realized gain (loss) on:
Security transactions 2,011,014
Futures transactions (963,282)
------------
Net realized gain on investments and futures
transactions 1,047,732
------------
Net change in unrealized appreciation on:
Security transactions (7,803,829)
Futures contracts 82,425
------------
Net change in unrealized appreciation on
investments and futures contracts (7,721,404)
------------
Net realized and unrealized loss on investments
and futures transactions (6,673,672)
------------
Net increase in net assets resulting from
operations $ 2,608,849
============
</Table>
16 MainStay Tax Free Bond Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2007 AND OCTOBER 31, 2006
<Table>
<Caption>
2007 2006
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 9,282,521 $ 10,052,034
Net realized gain on investments
and futures transactions 1,047,732 2,435,271
Net increase from payments from
Manager for losses attributable
to shareholder trading
arrangements (see Note 3(B) on
page 22.) -- 50,000
Net change in unrealized
appreciation on investments and
futures contracts (7,721,404) 773,273
---------------------------
Net increase in net assets
resulting from operations 2,608,849 13,310,578
---------------------------
Dividends to shareholders:
From net investment income:
Class A (7,661,668) (6,785,506)
Class B (1,423,809) (3,026,250)
Class C (236,790) (227,488)
---------------------------
Total dividends to shareholders (9,322,267) (10,039,244)
---------------------------
Capital share transactions:
Net proceeds from sale of shares 11,195,604 17,782,656
Net asset value of shares issued
to shareholders in reinvestment
of dividends 6,365,375 6,584,828
Cost of shares redeemed (35,035,087) (48,512,850)
Net asset value of shares converted
(See Note 1):
Class A 9,135,539 166,833,101
Class B (9,135,539) (166,833,101)
---------------------------
Decrease in net assets derived
from capital share transactions (17,474,108) (24,145,366)
---------------------------
Net decrease in net assets (24,187,526) (20,874,032)
NET ASSETS:
Beginning of year 252,070,994 272,945,026
---------------------------
End of year $227,883,468 $252,070,994
===========================
Accumulated distributions in excess
of net investment income at end of
year $ (80,939) $ (249,684)
===========================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------------------
JANUARY 1,
2003* YEAR
THROUGH ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of period $ 9.75 $ 9.62 $ 9.84 $ 9.75 $ 10.02 $ 9.62
-------- -------- ------- ------- ----------- ------------
Net investment income 0.38 0.38 (a) 0.38 0.38 0.30 0.41
Net realized and unrealized gain (loss) on
investments (0.27) 0.13 (e) (0.21) 0.07 (0.25) 0.40
-------- -------- ------- ------- ----------- ------------
Total from investment operations 0.11 0.51 0.17 0.45 0.05 0.81
-------- -------- ------- ------- ----------- ------------
Less dividends:
From net investment income (0.38) (0.38) (0.39) (0.36) (0.32) (0.41)
-------- -------- ------- ------- ----------- ------------
Net asset value at end of period $ 9.48 $ 9.75 $ 9.62 $ 9.84 $ 9.75 $ 10.02
======== ======== ======= ======= =========== ============
Total investment return (b) 1.12% 5.43%(d)(e) 1.77% 4.71% 0.54%(c) 8.61%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 3.88% 3.93% 3.92% 3.88% 3.64%+ 4.19%
Net expenses 0.89% 0.89% 0.89% 1.02% 1.04%+ 1.03%
Expenses (before waiver/reimbursement) 1.06% 1.09%(d) 1.06% 1.06% -- --
Portfolio turnover rate 59% 55% 26% 18% 34% 39%
Net assets at end of period (in 000's) $189,210 $200,593 $38,508 $37,936 $42,712 $46,131
</Table>
<Table>
<Caption>
CLASS C
-----------------------------------------------------------------------------
JANUARY 1,
2003* YEAR
THOUGH ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning of period $ 9.75 $ 9.62 $ 9.85 $ 9.75 $10.02 $ 9.62
------ ------ ------ ------ ----------- ------------
Net investment income 0.35 0.36 (a) 0.36 0.36 0.28 0.39
Net realized and unrealized gain (loss) on
investments (0.27) 0.13 (e) (0.22) 0.08 (0.25) 0.40
------ ------ ------ ------ ----------- ------------
Total from investment operations 0.08 0.49 0.14 0.44 0.03 0.79
------ ------ ------ ------ ----------- ------------
Less dividends:
From net investment income (0.35) (0.36) (0.37) (0.34) (0.30) (0.39)
------ ------ ------ ------ ----------- ------------
Net asset value at end of period $ 9.48 $ 9.75 $ 9.62 $ 9.85 $ 9.75 $10.02
====== ====== ====== ====== =========== ============
Total investment return (b) 0.86% 5.16%(d)(e) 1.41% 4.55% 0.32%(c) 8.34%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 3.63% 3.68% 3.67% 3.63% 3.39%+ 3.94%
Net expenses 1.14% 1.14% 1.14% 1.27% 1.29%+ 1.28%
Expenses (before waiver/reimbursement) 1.31% 1.34%(d) 1.31% 1.31% -- --
Portfolio turnover rate 59% 55% 26% 18% 34% 39%
Net assets at end of period (in 000's) $6,752 $5,949 $6,231 $5,992 $5,840 $7,555
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges.
(c) Total return is not annualized.
(d) Includes nonrecurring reimbursement from Manager for professional fees. The effect on
total return was less than one hundredth of a percent.
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses was less than 0.01% per share
on net realized gains on investments and the effect on total investment return was less
than 0.01%.
</Table>
18 MainStay Tax Free Bond Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
------------------------------------------------------------------------------------
JANUARY 1,
2003* YEAR
THROUGH ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
$ 9.75 $ 9.62 $ 9.85 $ 9.75 $ 10.02 $ 9.62
-------- ------- -------- -------- ----------- ------------
0.34 0.36 (a) 0.36 0.36 0.28 0.39
(0.26) 0.13 (e) (0.22) 0.08 (0.25) 0.40
-------- ------- -------- -------- ----------- ------------
0.08 0.49 0.14 0.44 0.03 0.79
-------- ------- -------- -------- ----------- ------------
(0.35) (0.36) (0.37) (0.34) (0.30) (0.39)
-------- ------- -------- -------- ----------- ------------
$ 9.48 $ 9.75 $ 9.62 $ 9.85 $ 9.75 $ 10.02
======== ======= ======== ======== =========== ============
0.86% 5.16%(d)(e) 1.41% 4.55% 0.32%(c) 8.34%
3.63% 3.68% 3.67% 3.63% 3.39%+ 3.94%
1.14% 1.14% 1.14% 1.27% 1.29%+ 1.28%
1.31% 1.34%(d) 1.31% 1.31% -- --
59% 55% 26% 18% 34% 39%
$ 31,921 $45,529 $228,206 $261,626 $297,458 $323,349
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises nineteen funds (collectively referred to as the
"Funds"). These financial statements and notes relate only to MainStay Tax Free
Bond Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Class A shares commenced on
January 3, 1995. Class B shares commenced on May 1, 1986. Class C shares
commenced on September 1, 1998. Class A shares are offered at net asset value
per share plus an initial sales charge. No sales charge applies on investments
of $1 million or more (and certain other qualified purchases) in Class A shares,
but a contingent deferred sales charge is imposed on certain redemptions of such
shares within one year of the date of purchase. Class B shares and Class C
shares are offered without an initial sales charge, although a declining
contingent deferred sales charge may be imposed on redemptions made within up to
six years of purchase of Class B shares and a 1% contingent deferred sales
charge may be imposed on redemptions made within one year of purchase of Class C
shares. As approved by the Board of Trustees in 1997, Class B shares convert to
Class A shares eight years after the date they were purchased. The three classes
of shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that Class
B and Class C shares are subject to higher distribution fee rates than Class A
shares under a distribution plan pursuant to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to provide a high level of current income
free from regular federal income tax, consistent with the preservation of
capital.
The ability of issuers of debt securities held by the Fund to meet their
obligations may be affected by economic developments in a specific industry or
region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent or brokers selected by the Fund's Manager, as defined in Note 3,
whose prices reflect broker/dealer supplied valuations and electronic data
processing techniques, if such prices are deemed by the Fund's Manager to be
representative of market values, at the regular close of trading of the New York
Stock Exchange (generally 4:00 p.m. Eastern time) on each day the Fund is open
for business. Futures contracts are valued at the last posted settlement price
on the market where such futures are primarily traded.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: a security the trading for which has been
halted or suspended; a debt security that has recently gone into default and for
which there is not a current market quotation; a security of an issuer that has
entered into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; a security where the trading on that security's principal market
is temporarily closed at a time when, under normal conditions, it would be open.
At October 31, 2007, the Fund did not hold securities that were valued in such a
manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
of net investment income monthly and distributions of net realized capital and
currency gains, if any, annually. All dividends and distributions are reinvested
in shares of the Fund, at net asset value, unless the shareholder elects
otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America. Permanent
book/tax differences relating to income and gains are reclassified amongst
undistributed net investment income, accumulated net realized gain or loss and
paid-in-capital.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the
20 MainStay Tax Free Bond Fund
trade date. Realized gains and losses on security transactions are determined
using the identified cost method. Interest income is accrued as earned using the
effective interest rate method. Discounts and premiums on securities purchased,
other than short-term securities, for the Fund are accreted and amortized,
respectively, on the effective interest rate method over the life of the
respective securities or, in the case of a callable security, over the period to
the first date of call. Discounts and premiums on short-term securities are
accreted and amortized, respectively, on the straight line method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (C) on
page 22) are allocated to separate classes of shares pro rata based upon their
relative net assets value on the date the expenses are incurred. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) FUTURES CONTRACTS. A futures contract is an agreement to purchase or sell a
specified quantity of an underlying instrument at a specified future date and
price, or to make or receive a cash payment based on the value of a securities
index. During the period the futures contract is open, changes in the value of
the contract are recognized as unrealized gains or losses by "marking to market"
such contract on a daily basis to reflect the market value of the contract at
the end of each day's trading. The Fund agrees to receive from or pay to the
broker an amount of cash equal to the daily fluctuation in the value of the
contract. Such receipts or payments are known as "variation margin". When the
futures contract is closed, the Fund records a realized gain or loss equal to
the difference between the proceeds from (or cost of) the closing transaction
and the Fund's basis in the contract. The Fund invests in U.S. Treasury futures
contracts to gain full exposure to changes in bond market prices to fulfill its
investment objective. The Fund may enter into contracts for the future delivery
of debt securities in order to attempt to protect against the effect of adverse
changes in interest rates, to lengthen or shorten the average maturity or
duration of the Fund's portfolio or to try to enhance the Fund's returns.
The use of futures contracts involves, to varying degrees, elements of market
risk in excess of the amount recognized in the Statement of Assets and
Liabilities. The contract or notional amounts and variation margin reflect the
extent of the Fund's involvement in open futures positions. Risks arise from the
possible imperfect correlation in movements in the price of futures contracts,
interest rates and the underlying hedged assets, and the possible inability of
counterparties to meet the terms of their contracts. However, the Fund's
activities in futures contracts are conducted through regulated exchanges which
minimize counterparty credit risks.
(H) INDEMNIFICATIONS. In the normal course of business, the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote.
However, there can be no assurance that material liabilities related to such
obligations will not arise in the future which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager") a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. NYLIM provides offices and conducts clerical, recordkeeping and
bookkeeping services, and is responsible for the financial and accounting
records required to be maintained by the Fund. NYLIM also pays the salaries and
expenses of all personnel affiliated with the Fund and all the operational
expenses that are not the responsibility of the Fund. MacKay Shields LLC (the
"Subadvisor"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life, serves as subadvisor to the Fund and is responsible
for the day-to-day portfolio management of the Fund. Pursuant to the terms of a
Subadvisory Agreement between NYLIM and the Subadvisor, NYLIM pays for the
services of the Subadvisor.
The Fund is contractually obligated to pay NYLIM a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.60% on assets up to $1.0 billion and 0.55% on
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
assets in excess of $1.0 billion. NYLIM has contractually agreed to waive its
management fee by 0.15% to 0.45% on assets up to $1.0 billion and 0.40% on
assets in excess of $1.0 billion which is not recoupable.
Effective March 1, 2007, NYLIM has entered into a written expense limitation
agreement under which it has agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses (total annual operating expenses
excluding taxes, interest, litigation, extraordinary expenses, and brokerage and
other transaction expenses relating to the purchase or sale of portfolio
investments) do not exceed the following amounts of average daily net assets for
each class: Class A, 0.89%; Class B, 1.14%; and Class C, 1.14%. This expense
limitation may be modified or terminated only with the approval of the Board of
Trustees. NYLIM may recoup the amount of any management fee waivers or expense
reimbursements from the Fund pursuant to the agreement if such action does not
cause the Fund to exceed existing expense limitations and the recoupment is made
within three years after the year in which NYLIM incurred the expense.
For the year ended October 31, 2007, NYLIM earned fees from the Fund in the
amount of $1,452,082 and waived its fees in the amount of $405,365 of which
$42,343 is recoupable.
As of October 31, 2007, the amounts of waived fees that are subject to possible
recoupment by NYLIM, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 2010 TOTAL
$30,280 $91,353 $42,343 $163,976
- --------------------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Prior to March 1, 2007, NYLIM had an agreement in place under which it had
agreed to waive a portion of the Fund's management fee or reimburse the expenses
of the Fund so that the Fund's total ordinary operating expenses did not exceed
0.89% of the Fund's average daily net assets for its Class A shares. NYLIM also
applied an equivalent waiver or reimbursement, in an equal amount of basis
points, to the other share classes of the Fund.
State Street Bank & Trust Company ("SSBT"), One Lincoln Street, Boston,
Massachusetts, 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with NYLIM. These services include calculating
daily net asset values of the Fund, maintaining general ledger and sub-ledger
accounts for the calculation of the Fund's respective net asset values, and
assisting NYLIM in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, SSBT is compensated by
NYLIM.
(B) PAYMENTS FROM AFFILIATES. NYLIM reimbursed or paid all expenses relating to
the Board of Trustees' review of certain shareholder trading matters as
described below in the footnote relating to "Other Matters." (See Note 9 on page
24).
The total dues associated with the Board of Trustees' review were approximately
$849,975 and included payments to certain third party service providers.
The amount that was reimbursed to the Tax Free Bond Fund was $35,010. Additional
payments were made by affiliates relating to the shareholder trading matters.
Further discussion regarding these payments by affiliates can be found below in
the footnote relating to "Other Matters."
(C) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted distribution plans (the "Plans") in accordance
with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives a monthly distribution
fee from the Fund at an annual rate of 0.25% of the average daily net assets of
the Fund's Class A shares, which is an expense of the Class A shares of the Fund
for distribution or service activities as designated by the Distributor.
Pursuant to the Class B and Class C Plans, the Fund pays the Distributor a
monthly distribution fee, which is an expense of the Class B and Class C shares
of the Fund, at the annual rate of 0.25% of the average daily net assets of the
Fund's Class B and Class C shares. The Plans provide that the Class B and Class
C shares of the Fund also incur a service fee at the annual rate of 0.25% of the
average daily net asset value of the Class B and Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(D) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $19,010 for the year ended
October 31, 2007. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $63, $28,930 and $779, respectively, for the year ended October 31,
2007.
(E) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is
22 MainStay Tax Free Bond Fund
responsible. Transfer agent expenses incurred by the Fund, for the year ended
October 31, 2007, amounted to $229,361.
(F) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts, effective March 1, 2007. Shareholders with an account
balance of less than $1,000 are charged an annual per account fee of $20
(assessed semi-annually).
(G) CAPITAL. At October 31, 2007, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $52,847 0.0*%
- ----------------------------------------------------------
Class C 107 0.0*
- ----------------------------------------------------------
</Table>
* Less than one-tenth of a percent.
(H) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2007, these fees, which are included in professional fees
shown on the Statement of Operations, were $9,047.
The Fund pays the Manager a monthly fee for certain pricing and recordkeeping
services provided under the Accounting Agreement at the annual rate of 1/20 of
1% for the first $20 million of average monthly net assets, 1/30 of 1% of the
next $80 million of average monthly net assets and 1/100 of 1% of any amount in
excess of $100 million of average monthly net assets. Fees for these services
provided to the Fund by the Manager amounted to $50,868 for the year ended
October 31, 2007.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2007, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED CAPITAL AND OTHER UNREALIZED TOTAL
TAX EXEMPT OTHER GAIN TEMPORARY APPRECIATION ACCUMULATED
INCOME (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$144,427 $(24,048,576) $(225,365) $5,255,651 $(18,873,863)
--------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized appreciation is
primarily due to tax treatment of futures transactions.
The other temporary differences are primarily due to distribution payables.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income, accumulated net realized loss
on investments and additional paid-in-capital, arising from permanent
differences; net assets at October 31, 2007 are not affected.
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED
NET INVESTMENT NET REALIZED ADDITIONAL
INCOME (LOSS) GAIN (LOSS) PAID-IN-CAPITAL
$208,491 $3,833,473 $(4,041,964)
-----------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to capital loss
carryforwards expiring and sale of partnership investments.
At October 31, 2007, for federal income tax purposes, capital loss carryforwards
of $24,048,576 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. To the extent that these loss carryforwards are used to
offset future capital gains, it is probable that the capital gains so offset
will not be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2008 $15,453
2011 8,117
2012 479
-------------------------------------------
$24,049
-------------------------------------------
</Table>
The Fund utilized $921,665 of capital loss carryforwards during the year ended
October 31, 2007.
The Fund had $4,041,964 of capital loss carryforwards that expired during the
year ended October 31, 2007.
The tax character of distributions paid during the years ended October 31, 2007
and October 31, 2006, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2007 2006
Distributions paid from:
Ordinary Income $ 2,988 $ 3,255
Exempt Interest Dividends 9,319,279 10,035,989
- -----------------------------------------------------------
$9,322,267 $10,039,244
- -----------------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
SSBT is the custodian of cash and securities of the Fund. Custodial fees are
charged to the Fund based on the market value of securities in the Fund and the
number of certain cash transactions incurred by the Fund.
NOTE 6--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
requests. These funds pay a commitment fee, at an annual rate of .060% of the
average commitment amount, regardless of usage, to The Bank of New York, which
acts as agent to the syndicate. Such commitment fees are allocated among the
funds based upon net assets and other factors. Interest on any revolving credit
loan is charged based upon the Federal Funds Advances rate. There were no
borrowings made or outstanding on the line of credit during the year ended
October 31, 2007.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2007, purchases and sales of securities, other
than short-term securities, were $142,084 and $169,166 respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 731 $ 7,061
Shares issued to shareholders in
reinvestment of dividends: 546 5,253
Shares redeemed (2,842) (27,359)
----------------------
Net decrease in shares outstanding
before conversion (1,565) (15,045)
Shares converted from Class B (See
Note 1) 948 9,136
----------------------
Net decrease (617) $ (5,909)
======================
Year ended October 31, 2006:
Shares sold 1,521 $ 15,344
Shares issued to shareholders in
reinvestment of dividends: 485 4,667
Shares redeemed (2,635) (26,064)
----------------------
Net decrease in shares outstanding
before conversion (629) (6,053)
Shares converted from Class B (See
Note 1) 17,199 166,833
----------------------
Net increase 16,570 $ 160,780
======================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 146 $ 1,409
Shares issued to shareholders in
reinvestment of dividends: 100 960
Shares redeemed (601) (5,787)
----------------------
Net decrease in shares outstanding
before conversion (355) (3,418)
Shares reacquired upon conversion
into Class A (See Note 1) (948) (9,136)
----------------------
Net decrease (1,303) $ (12,554)
======================
Year ended October 31, 2006:
Shares sold 156 $ 1,505
Shares issued to shareholders in
reinvestment of dividends: 182 1,747
Shares redeemed (2,182) (20,984)
----------------------
Net decrease in shares outstanding
before conversion (1,844) (17,732)
Shares reacquired upon conversion
into Class A (See Note 1) (17,199) (166,833)
----------------------
Net decrease (19,043) $(184,565)
======================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 282 $ 2,725
Shares issued to shareholders in
reinvestment of dividends: 16 152
Shares redeemed (196) (1,888)
----------------------
Net increase 102 $ 989
======================
Year ended October 31, 2006:
Shares sold 97 $ 933
Shares issued to shareholders in
reinvestment of dividends: 18 170
Shares redeemed (152) (1,465)
----------------------
Net decrease (37) $ (362)
======================
</Table>
NOTE 9--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission ("SEC") and the New York State
Attorney General, and, as noted in the notes to the year-end 2004, 2005 and 2006
financial statements of each fund of the Trust, NYLIM was previously a party to
arrangements with certain registered representatives of broker-dealers relating
to the level of trading by clients of those registered representatives in shares
of certain funds of the Trust. All such arrangements were terminated by the
fourth quarter of 2003.
NYLIM and the Trustees of the Trust undertook a review of the possible dilutive
effects that transactions under those arrangements and certain other levels of
trading by Fund
24 MainStay Tax Free Bond Fund
shareholders over the period from 1999 to 2003 may have had on the funds. As a
result of this review, in December 2005, NYLIM made payments totaling $5.882
million to nine MainStay funds. The amount paid to the MainStay Tax Free Bond
Fund was $50,000. NYLIM has reimbursed or paid all expenses relating to the
Board of Trustees' review of this matter.
In a separate matter, in 2004 the SEC raised concerns relating to a guarantee
provided to shareholders of the MainStay Equity Index Fund and the fees and
expenses of that Fund as well as the related guarantee disclosure to that fund's
shareholders. Discussions have been held with the SEC concerning a possible
resolution of this matter. There can be no assurance of the outcome of these
efforts.
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS:
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation becomes effective for the Fund's 2008 fiscal
year, and is to be applied to all open tax years as of the date of
effectiveness. Based on Management's analysis, the determination has been made
that the adoption of the interpretation on November 1, 2007, did not have an
impact on the Fund's financial statements upon adoption. Management continually
reviews the Fund's tax positions and such conclusions under the Interpretation
based on factors, including, but not limited to, ongoing analyses of tax laws,
regulations and interpretations, thereof.
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The changes to current generally accepted accounting
principles from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures
about fair value measurements. As of October 31, 2007, the Fund does not believe
the adoption of SFAS No. 157 will impact the amounts reported in the Fund's
financial statements. However, additional disclosures may be required about the
inputs used to develop the measurements and the effect of certain measurements
reported in the financial statements for a fiscal period.
NOTE 11--RECENT DEVELOPMENTS:
On May 21, 2007, the United States Supreme Court agreed to hear an appeal in
Department of Revenue of Kentucky v. Davis, a case concerning the validity of
statutes that create a state tax exemption for interest from municipal
securities. The Kentucky Court of Appeals had held that Kentucky's statute,
which provided an exemption for interest earned on municipal securities of
Kentucky issuers while taxing interest earned on municipal securities of issuers
in other states, violated the Interstate Commerce Clause of the United States
Constitution. If the Supreme Court were to adopt the reasoning of the Kentucky
Court of Appeals, its decision would affect the state tax status of fund
distributions. It is unclear how such a decision would affect the market for
municipal securities, but it could adversely affect the value of securities held
by the fund, and therefore of the fund's shares. Such a decision could also
prompt legislation at the state level that would have further impacts upon the
taxability of fund distributions and upon the market for municipal securities.
www.mainstayfunds.com 25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Tax Free Bond Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2007, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the four-year period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the periods presented through October 31,
2003, were audited by other auditors, whose report dated December 18, 2003,
expressed an unqualified opinion thereon.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2007, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Tax Free Bond Fund of The MainStay Funds as of October 31, 2007, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the four-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 20, 2007
26 MainStay Tax Free Bond Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with New York Life Investment Management LLC (the "Manager") and the
Subadvisory Agreement between the Manager and MacKay Shields LLC, a wholly-owned
indirect subsidiary of New York Life Investment Management Holdings LLC, an
affiliate of the Manager, (the "Subadvisor"), (each an "Agreement") at a meeting
held on May 22 and 23, 2007. In connection with the approval of each Agreement,
the Trustees reviewed a significant amount of a wide variety of information that
they had requested and received from the Manager and the Subadvisor, and data
and analysis from an outside data provider and a third party consultant. The
Trustees considered various industry trends and regulatory developments in their
deliberations. In considering approval of each Agreement, and in evaluating the
fairness of the compensation to be paid by the Fund, the Trustees met both as a
full Board and in executive session with no Interested Trustee present, in
advance of the meeting at which the Agreements were approved, and they
considered a number of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and the Subadvisor have provided historically to the Fund, and
also generally to other series of the Trust. Among other services, the Manager's
services have included investment management services, including monitoring and
evaluating the Subadvisor's investment program and investment results with
respect to the Fund, and the Subadvisor's compliance with the Fund's investment
policies and restrictions, and administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets,
and its other services include, among other services, providing reports to the
Manager and reviewing certain aspects of Fund filings. The Trustees considered,
among other things, the Manager's and Subadvisor's management, personnel,
resources, operations and portfolio management capabilities. The Board reviewed
reports on the Subadvisor's brokerage practices, including with respect to best
execution of portfolio trades. The Trustees considered the Manager's supervision
of the Fund's service providers and its attention to the compliance program of
the Trust, the Manager, the Subadvisor and certain other service providers, as
well as the Subadvisor's attention to its compliance program. The Trustees noted
the generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, underperformance when compared
over several time periods with groupings of funds having similar mandates and
the Fund's recent improvement in investment performance over the short term.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information that indicated that the profitability to the Manager and its
affiliates from the Management Agreement, and from the overall relationship with
the Trust, was low. The Trustees considered other benefits that the Manager and
its affiliates receive from the relationship with the Trust, including benefits
that NYLIFE Distributors and MainStay Shareholder Services receive in exchange
for services they provide to the Funds, and certain benefits from soft dollar
arrangements. The Trustees acknowledged certain benefits to the reputation of
the Manager and the Trust from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the Manager's willingness to implement a
contractual breakpoint that would reduce the Fund's management fee at asset
levels above the breakpoint, and the fact that the breakpoint was intended to
provide that shareholders would share in benefits from economies of scale
obtained through the growth in the Fund's assets. The Trustees noted that the
Fund not reached the asset level at which the breakpoint would reduce the Fund's
management fee rate. The Trustees reviewed information about the potential
effect of asset growth on Fund expenses, the difficulty of forecasting its
effect on the profitability of the Manager and its affiliates, and the
management fee breakpoints applicable to the Fund and certain other funds. It
was noted that, to the extent the Fund's gross expenses currently were higher
than its net expenses, the reduction of the Fund's gross expenses through the
achievement of economies of scale might benefit the Manager by reducing the
expenses
www.mainstayfunds.com 27
the Manager must reimburse to the Fund rather than directly benefiting the Fund
by reducing its net expenses. The Trustees considered information about transfer
agency expenses and their effect on the Fund's overall expenses. They considered
that, across the Trust (though not every series or share class), gross transfer
agency fees tended to be relatively high and, therefore, adversely affected
gross expense ratios. Noting that the Trust historically permitted smaller
investor accounts, the Trustees considered measures that had been recently
implemented that were intended to increase the average size of shareholder
accounts, including generally higher investment minimums and small account fees,
and the Trustees considered potential benefits to the Manager and its affiliates
arising from such measures.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by the
Fund, the Trustees evaluated factors such as the fees and expenses borne by
other registered funds in the market pursuing strategies generally similar to
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager and Subadvisor, including separate institutional
accounts having investment strategies similar to that of the Fund, and took
account of explanations and other information relating to the fees and expenses
of those other funds and accounts. The Trustees considered the current and
proposed contractual and net management fees, its anticipated gross and net
expense ratio, and various components of the expense ratio, in comparison to
other funds in comparison groupings. The Trustees generally acknowledged the
historical relationships among the Manager, the Subadvisor and the Trust and the
likely difficulties in implementing an alternative to the investment management
arrangement between the Trust and the Manager. The Trustees noted the Manager's
agreement to continue to waive a certain portion of its management fee and
maintain the existing contractual limitation on the Fund's net expenses.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings, with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. This summary set out
above describes the most important, but not all, of the factors considered by
the Trustees in considering each Agreement. On the basis of their review, a
majority of the Trustees and a majority of the Non-Interested Trustees concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the judgment of a
majority of the Trustees and a majority of the Non-Interested Trustees that
approval of each Agreement was in the best interests of the Fund and its
shareholders.
28 MainStay Tax Free Bond Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
For Federal individual income tax purposes, the Fund hereby designates 100% of
the ordinary income dividends paid during its fiscal year ended October 31, 2007
as attributable to interest income from Tax Exempt Municipal Bonds. Such
dividends are currently exempt from Federal income taxes under Section 103 (a)
of the Internal Revenue Code.
In January 2008, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2007. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2007.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
or (iii) on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available
without charge on the SEC's website at www.sec.gov or by calling NYLIM at
1-800-MAINSTAY (1-800-624-6782). You also can obtain and review copies of Form
N-Q by visiting the SEC's Public Reference Room in Washington, DC (information
on the operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330).
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of The MainStay Funds (the
"Trust") was held on May 4, 2007, at the offices of New York Life Investment
Management LLC in Parsippany, New Jersey. The purpose of the meeting was to
elect the following individuals to the Board of Trustees of the Trust:
- Susan B. Kerley
- Alan R. Latshaw
- Peter Meenan
- Richard H. Nolan, Jr.
- Richard S. Trutanic
- Roman L. Weil
- John A. Weisser
- Brian A. Murdock (Interested Trustee)
There are no other Trustees of the Trust.
No other business came before the special meeting. The proposal to elect
Trustees was passed by the shareholders of the Fund as shown below:
<Table>
<Caption>
TAX FREE VOTES VOTES
BOND FUND FOR WITHHELD ABSTENTIONS TOTAL
Susan B.
Kerley 12,315,669.106 188,241.182 2,698.000 12,506,608.288
- --------------------------------------------------------------------------
Alan R.
Latshaw 12,335,117.577 168,792.711 2,698.000 12,506,608.288
- --------------------------------------------------------------------------
Peter Meenan 12,337,581.992 166,328.296 2,698.000 12,506,608.288
- --------------------------------------------------------------------------
Richard H.
Nolan, Jr. 12,328,370.933 175,539.355 2,698.000 12,506,608.288
- --------------------------------------------------------------------------
Richard S.
Trutanic 12,312,447.585 191,462.703 2,698.000 12,506,608.288
- --------------------------------------------------------------------------
Roman L. Weil 12,335,813.813 168,096.475 2,698.000 12,506,608.288
- --------------------------------------------------------------------------
John A.
Weisser 12,321,078.012 182,832.276 2,698.000 12,506,608.288
- --------------------------------------------------------------------------
Brian A.
Murdock 12,323,976.756 179,933.532 2,698.000 12,506,608.288
- --------------------------------------------------------------------------
</Table>
This resulted in approval of the proposal.
www.mainstayfunds.com 29
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Pursuant to
notice, a Special Meeting of Shareholders of the Trust was held on May 4, 2007,
at NYLIM's offices in Parsippany, New Jersey. The Trustees listed below were
elected to serve the Trust effective June 7, 2007.
Each Trustee serves until his or her successor is elected and qualified or until
his or her resignation, death or removal. The Retirement Policy provides that a
Trustee shall tender his or her resignation upon reaching age 72. A Trustee
reaching the age of 72 may continue for additional one-year periods with the
approval of the Board's Nominating and Governance Committee, except that no
Trustee shall serve on the Board past his or her 75th birthday. Officers serve a
term of one year and are elected annually by the Trustees. The business address
of each Trustee and officer listed below is 51 Madison Avenue, New York, New
York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF FUNDS
POSITION(S) HELD IN FUND COMPLEX
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
BRIAN A. MURDOCK Indefinite; Member of the Board of Managers 73 Trustee, Eclipse Funds since
3/14/56 Trustee and Chief and President (since 2004) and June, 2007 (3 funds); Director,
Executive Officer Chief Executive Officer (since Eclipse Funds Inc. since June
since 2006 2006), New York Life Investment 2007 (22 funds); Director,
Management LLC and New York MainStay VP Series Fund, Inc.,
Life Investment Management since 2006 (24 portfolios);
Holdings LLC; Senior Vice Director, ICAP Funds, Inc.,
President, New York Life since 2006 (3 funds)
Insurance Company (since 2004);
Chairman of the Board and
President, NYLIFE Distributors
LLC (since 2004); Member of the
Board of Managers, NYLCAP
Manager LLC and Madison Capital
Funding LLC (since 2004),
MacKay Shields LLC and
Institutional Capital LLC
(since 2006), and McMorgan &
Company LLC (since 2007); Chief
Executive Officer, Eclipse
Funds and Eclipse Funds Inc.
(since 2006); Chairman (2006 to
2007) and Director and Chief
Executive Officer (since 2006),
MainStay VP Series Fund, Inc.;
Director and Chief Executive
Officer, ICAP Funds, Inc.
(since 2006); Chief Investment
Officer, MLIM Europe and Asia
(2001 to 2003); President of
Merrill Japan and Chairman of
MLIM's Pacific Region (1999 to
2001)
-----------------------------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow Capital
Management, Inc., McMorgan & Company LLC, NYLIFE Securities Inc. and/or NYLIFE
Distributors LLC, as described in detail above in the column "Principal
Occupation(s) During Past Five Years."
30 MainStay Tax Free Bond Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. KERLEY Indefinite; Partner, Strategic Management 73 Chairman since 2005 and Trustee
8/12/51 Chairman and Advisors LLC (since 1990) since 2000, Eclipse Funds (3
Trustee since funds); Chairman since 2005 and
June 2007 Director since 1990, Eclipse
Funds Inc. (22 funds); Chairman
and Director, ICAP Funds, Inc.,
since 2006 (3 funds); Chairman
and Director, MainStay VP
Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
Legg Mason Partners Funds,
Inc., since 1991 (30
portfolios)
----------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & Young 73 Trustee, Eclipse Funds since
3/27/51 Trustee and Audit LLP (2002 to 2003); Partner, June 2007 (3 funds); Director,
Committee Arthur Andersen LLP (1989 to Eclipse Funds Inc. since June
Financial Expert 2002); Consultant to the Audit 2007 (22 funds); Director, ICAP
since 2006 and Compliance Committee of The Funds, Inc., since June 2007 (3
MainStay Funds (2004 funds); Director, MainStay VP
to 2006) Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
State Farm Associates Funds
Trusts since 2005 (3
portfolios); Trustee, State
Farm Mutual Fund Trust since
2005 (15 portfolios); Trustee,
State Farm Variable Product
Trust since 2005 (9 portfolios)
----------------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds since
12/5/41 Trustee since President and Chief Executive 2002 (3 funds); Director,
June 2007 Officer, Babson-United, Inc. Eclipse Funds Inc. since 2002
(financial services firm) (2000 (22 funds); Director, ICAP
to 2004); Independent Funds, Inc.,
Consultant (1999 to 2000); Head since 2006 (3 funds); Director,
of Global Funds, Citicorp (1995 MainStay VP Series Fund, Inc.,
to 1999) since June 2007 (24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 73 Trustee, Eclipse Funds since
NOLAN, JR. Trustee since Management; President--Shields/ June 2007 (3 funds); Director,
11/16/46 June 2007 Alliance, Alliance Capital Eclipse Funds Inc. since June
Management (1994 to 2004) 2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 2006
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman (since 1990) and Chief 73 Trustee, Eclipse Funds since
TRUTANIC Trustee since Executive Officer (1990 to June 2007 (3 funds); Director,
2/13/52 1994 1999), Somerset Group Eclipse Funds Inc. since June
(financial advisory firm); 2007 (22 funds); Director, ICAP
Managing Director and Advisor, Funds, Inc., since June 2007 (3
The Carlyle Group (private funds); Director, MainStay VP
investment firm) (2002 to Series Fund, Inc., since June
2004); Senior Managing Director 2007 (24 portfolios)
and Partner, Groupe Arnault
S.A. (private investment firm)
(1999
to 2002)
----------------------------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 31
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEE
ROMAN L. WEIL Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds since
5/22/40 Trustee and Audit Accounting, Graduate School of June 2007 (3 funds); Director,
Committee Business, University of Eclipse Funds Inc. since June
Financial Expert Chicago; President, Roman L. 2007 (22 funds); Director, ICAP
since June 2007 Weil Associates, Inc. Funds, Inc., since June 2007 (3
(consulting firm) funds); Director, MainStay VP
Series Fund, Inc., since 1994
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 73 Trustee, Eclipse Funds since
10/22/41 Trustee since Salomon Brothers, Inc. (1971 to June 2007 (3 funds); Director,
June 2007 1995) Eclipse Funds Inc. since June
2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 1997
(24 portfolios); Trustee,
Direxion Funds (69 funds) and
Direxion Insurance Trust (45
funds) since March 2007
----------------------------------------------------------------------------------------------------------------------
</Table>
Terry L. Lierman resigned as Trustee of the Trust effective May 31, 2007. Edward
J. Hogan, John B. McGuckian and Donald E. Nickelson resigned as Trustees of the
Trust effective June 7, 2007.
At a meeting of the Board of Trustees held on June 7 and 8, 2007, the following
individuals were appointed to serve as Officers of the Trust effective June 7,
2007:
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ROBERT A. Chief Legal Senior Managing Director, General Counsel and Secretary, New
ANSELMI Officer since York Life Investment Management LLC (including predecessor
10/19/46 2004 advisory organizations) (since 2000); Secretary (since 2001)
and General Counsel (since 2004), New York Life Investment
Management Holdings LLC; Senior Vice President, New York
Life Insurance Company (since 2000); Vice President and
Secretary, McMorgan & Company LLC (since 2001); Secretary,
NYLIM Service Company LLC (since 2005), NYLCAP Manager LLC
(since 2004), Madison Capital Funding LLC (since 2002), and
Institutional Capital LLC (since 2006); Chief Legal Officer,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), McMorgan Funds (since 2005) and
ICAP Funds, Inc. (since 2006); Managing Director and Senior
Counsel, Lehman Brothers Inc. (1998 to 1999); General
Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998)
-------------------------------------------------------------------------------------------------
JACK R. Treasurer and Managing Director, New York Life Investment Management LLC
BENINTENDE Principal (since June 2007); Treasurer and Principal Financial and
5/12/64 Financial and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
Accounting MainStay VP Series Fund, Inc., and ICAP Funds, Inc. (since
Officer since June 2007); Vice President, Prudential Investments (2000 to
June 2007 2007); Assistant Treasurer, JennisonDryden Family of Funds,
Target Portfolio Trust, The Prudential Series Fund and
American
Skandia Trust (2006 to 2007); Treasurer and Principal
Financial Officer, The Greater China
Fund (2007)
-------------------------------------------------------------------------------------------------
STEPHEN P. President since Senior Managing Director and Chief Marketing Officer, New
FISHER March 2007 York Life Investment Management LLC (since 2005); Managing
2/22/59 Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since March 2007); Managing Director, UBS
Global Asset Management (1999 to 2003)
-------------------------------------------------------------------------------------------------
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration predecessor advisory organizations) (since 2000); Executive
2/8/59 since 2005 Vice President, New York Life Trust Company (since 2006);
Vice President--Administration, Eclipse Funds, Eclipse Funds
Inc. and MainStay VP Series Fund, Inc. (since 2005) and ICAP
Funds, Inc. (since 2006)
-------------------------------------------------------------------------------------------------
</Table>
32 MainStay Tax Free Bond Fund
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Senior Managing Director and Chief Compliance Officer (since
MICUCCI President and 2006) and Managing Director and Chief Compliance Officer
12/16/65 Chief Compliance (2003 to 2006), New York Life Investment Management LLC and
Officer since New York Life Investment Management Holdings LLC; Senior
2006 Managing Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE Distributors
LLC; Chief Compliance Officer, NYLCAP Manager LLC (since
2006); Senior Vice President and Chief Compliance Officer,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund,
Inc., and ICAP Funds, Inc. (since 2006); Vice President--
Compliance, Eclipse Funds, Eclipse Funds Inc. and MainStay
VP Series Fund, Inc. (2004 to 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002)
-------------------------------------------------------------------------------------------------
MARGUERITE E.H. Secretary since Managing Director and Associate General Counsel, New York
MORRISON* 2004 Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC (since
2005); Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP Funds,
Inc. (since 2006); Chief Legal Officer--Mutual Funds and
Vice President and Corporate Counsel, The Prudential
Insurance Company of America (2000 to 2004)
-------------------------------------------------------------------------------------------------
</Table>
* In addition to serving as Secretary to the Trust, effective January 1, 2008,
Marguerite E.H. Morrison will assume the role of Chief Legal Officer to the
Trust.
Arphiela Arizmendi resigned as Treasurer and Principal Financial and Accounting
Officer of the Trust effective June 7, 2007.
Christopher O. Blunt resigned as President of the Trust effective March 12,
2007.
Alan J. Kirshenbaum resigned as Senior Vice President of the Trust effective
March 19, 2007.
www.mainstayfunds.com 33
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay 130/30 Core Fund
MainStay 130/30 Growth Fund
MainStay All Cap Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay 130/30 High Yield Fund(2)
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Institutional Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Principal Preservation Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay 130/30 International Fund
MainStay Global High Income Fund
MainStay ICAP International Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
RETIREMENT FUNDS
MainStay Retirement 2010 Fund
MainStay Retirement 2020 Fund
MainStay Retirement 2030 Fund
MainStay Retirement 2040 Fund
MainStay Retirement 2050 Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
New York, New York
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
Chicago, Illinois
MACKAY SHIELDS LLC(3)
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
MCMORGAN & COMPANY LLC(3)
San Francisco, California
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
This page intentionally left blank
(NEW YORK LIFE INVESTMENT MANAGEMENT LLC LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2007 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO11872 (RECYCLE LOGO) MS329-07 MST11-12/07
13
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
TOTAL RETURN FUND
Message from the President
and
Annual Report
October 31, 2007
MESSAGE FROM
THE PRESIDENT
The 12-month period ended October 31, 2007, was a dynamic one for mutual fund
investors. U.S. equity markets generally advanced, with growth stocks out-
performing value stocks at all capitalization levels. Although past performance
is no guarantee of future results, international stocks as a whole provided even
stronger returns for U.S. investors.
The progress of the equity markets, however, was far from steady. In February,
weakness in Asian markets led to sharp price declines around the globe. The
correction caused many investors to reconsider whether China and other emerging
economies could sustain their rapid growth. Fortunately, strong
corporate-earnings reports and positive economic news helped the stock market
regain its footing.
In July and August, difficulties in the subprime-mortgage market led to another
stock-market correction. A number of high-profile mortgage originators either
closed their doors or were sold to larger entities. Other leading financial
services firms faced major write-offs because of subprime-mortgage exposure.
The Federal Open Market Committee (FOMC) took prompt action to increase
liquidity and stabilize the financial markets by lowering the discount rate and
the federal funds target rate during the reporting period. These Federal Reserve
moves helped calm investor concerns, and the stock market generally advanced
from August 16, 2007, the date of an unscheduled FOMC meeting, through the end
of October 2007.
Difficulties in the subprime-mortgage market led to a "flight to quality," or a
general movement toward fixed-income securities that carry lower risk. As demand
for short- and intermediate-term Treasury securities increased, yields fell
across much of the maturity spectrum. Yields rose, however, on 20-and 30-year
Treasury bonds, and the yield curve steepened during the 12-month reporting
period.
High-yield bonds rallied from November 2006 through May 2007. But in June and
July, the yield differences--or spreads--between high-yield bonds and comparable
Treasury securities began to widen. At the end of October 2007, these spreads
were wider than when the reporting period began, making high-yield securities
more attractive to investors willing to accept higher risk.
To help investors address the challenges of today's ever-changing markets, New
York Life Investment Management LLC provides access to seven institutional
investment boutiques, each with its own proprietary research and investment
culture. As advisors and subadvisors to MainStay Funds, these boutiques bring a
wealth of experience and market insight to our shareholders. The portfolio
managers of each MainStay Fund seek to consistently apply time-tested investment
principles across a wide variety of market environments.
The report that follows provides more specific information about the market
forces and investment decisions that affected your investment in MainStay Funds
from November 1, 2006, through October 31, 2007. Please read the report
carefully. As you do, bear in mind that this annual report reflects just a short
segment of your lifetime investment journey. We look forward to continuing to
work with you, wherever that journey may lead.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
TOTAL RETURN FUND
MainStay Funds
Annual Report
October 31, 2007
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 25
- --------------------------------------------------------------------------------
Notes to Financial Statements 30
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 38
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 39
- --------------------------------------------------------------------------------
Federal Income Tax Information 41
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 41
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 41
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 41
- --------------------------------------------------------------------------------
Trustees and Officers 42
</Table>
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT
MONTH-END PERFORMANCE INFORMATION, PLEASE CALL 1-800-MAINSTAY (1-800-624-6782)
OR VISIT WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 6.01% 8.55% 4.71%
Excluding sales charges 12.18 9.78 5.31
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
TOTAL RETURN LEHMAN BROTHERS
MAINSTAY TOTAL RUSSELL 1000 CORE COMPOSITE AGGREGATE BOND
RETURN - CLASS A INDEX INDEX S&P 500 INDEX INDEX
---------------- ------------ -------------- ------------- ---------------
10/31/97 9450 10000 10000 10000 10000
10820 11971 11616 12199 10934
13029 15034 13375 15331 10992
14376 16396 14528 16264 11794
11338 12126 12884 12214 13512
9940 10356 12075 10369 14307
11332 12667 13934 12526 15009
11791 13849 15029 13706 15839
12785 15299 16046 14901 16018
14131 17750 17911 17336 16849
10/31/07 15852 20419 19913 19860 17757
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 6.37% 8.70% 4.54%
Excluding sales charges 11.37 8.99 4.54
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
TOTAL RETURN LEHMAN BROTHERS
MAINSTAY TOTAL RUSSELL 1000 CORE COMPOSITE AGGREGATE BOND
RETURN - CLASS B INDEX INDEX S&P 500 INDEX INDEX
---------------- ------------ -------------- ------------- ---------------
10/31/97 10000 10000 10000 10000 10000
11358 11971 11616 12199 10934
13578 15034 13375 15331 10992
14888 16396 14528 16264 11794
11659 12126 12884 12214 13512
10138 10356 12075 10369 14307
11474 12667 13934 12526 15009
11849 13849 15029 13706 15839
12756 15299 16046 14901 16018
13998 17750 17911 17336 16849
10/31/07 15589 20419 19913 19860 17757
</Table>
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect maximum applicable sales charges explained in this paragraph, change in
share price, and reinvestment of dividend and capital-gain distributions. The
graphs assume an initial investment of $10,000 and reflect the deduction of all
sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase and have an annual 12b-1 fee of 1.00%.
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee and are generally available to corporate and institutional investors
with a minimum initial investment of $5 million. Performance figures reflect
certain fee waivers and/or expense limitations, without which total returns may
have been lower. These fee waivers and/or expense limitations are contractual
and may be modified or terminated only with the approval of the Board of
Trustees. The Manager may recoup the amount of certain management fee waivers or
expense reimbursements from the Fund pursuant to the contract if such action
does not cause the Fund to exceed existing expense limitations and the
recoupment is made within three years after the year in which the Manager
incurred the expense. Prior to 9/1/98 (for Class C shares) and 12/31/03 (for
Class I shares), performance for Class C and Class I shares includes the
historical performance of Class B shares adjusted to reflect the applicable
sales charge (or CDSC), fees, estimated expenses and fee waivers/expense
limitations of Class C and Class I shares upon initial offer. Unadjusted, the
performance of the newer classes of shares might have been lower.
THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS AND
SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 10.33% 8.96% 4.53%
Excluding sales charges 11.33 8.96 4.53
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
TOTAL RETURN LEHMAN BROTHERS
MAINSTAY TOTAL RUSSELL 1000 CORE COMPOSITE AGGREGATE BOND
RETURN - CLASS C INDEX INDEX S&P 500 INDEX INDEX
---------------- ------------ -------------- ------------- ---------------
10/31/97 10000 10000 10000 10000 10000
11358 11971 11616 12199 10934
13578 15034 13375 15331 10992
14888 16396 14528 16264 11794
11659 12126 12884 12214 13512
10138 10356 12075 10369 14307
11474 12667 13934 12526 15009
11849 13849 15029 13706 15839
12750 15299 16046 14901 16018
13984 17750 17911 17336 16849
10/31/07 15568 20419 19913 19860 17757
</Table>
CLASS I SHARES-NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
12.65% 10.33% 5.71%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
TOTAL RETURN LEHMAN BROTHERS
MAINSTAY TOTAL RUSSELL 1000 CORE COMPOSITE AGGREGATE BOND
RETURN - CLASS I INDEX INDEX S&P 500 INDEX INDEX
---------------- ------------ -------------- ------------- ---------------
10/31/97 10000 10000 10000 10000 10000
11475 11971 11616 12199 10934
13855 15034 13375 15331 10992
15341 16396 14528 16264 11794
12136 12126 12884 12214 13512
10655 10356 12075 10369 14307
12187 12667 13934 12526 15009
12708 13849 15029 13706 15839
13917 15299 16046 14901 16018
15463 17750 17911 17336 16849
10/31/07 17420 20419 19913 19860 17757
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- -------------------------------------------------------------------------------
Russell 1000(R) Index(1) 15.03% 14.54% 7.40%
Total Return Core Composite Index(2) 11.18 10.52 7.13
S&P 500(R) Index(3) 14.56 13.88 7.10
Lehman Brothers(R) Aggregate Bond Index(4) 5.38 4.41 5.91
Average Lipper mixed-asset target allocation growth
fund(5) 13.51 11.74 6.61
</Table>
1. The Russell 1000(R) Index is an unmanaged index that measures the performance
of the 1,000 largest U.S. companies based on total market capitalization.
Results assume reinvestment of all income and capital gains. An investment
cannot be made directly in an index. The Russell 1000(R) Index is considered
to be the Fund's broad-based securities market index for comparison purposes.
2. The Fund's Total Return Core Composite Index consists of the Russell 1000(R)
Index and the Lehman Brothers(R) Aggregate Bond Index weighted 60%/40%,
respectively. Results assume that all income and capital gains are reinvested
in the index or indices that produce them. An investment cannot be made
directly in an index.
3. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500(R)
is an unmanaged index and is widely regarded as the standard for measuring
large-cap U.S. stock-market performance. Results assume reinvestment of all
income and capital gains. An investment cannot be made directly in an index.
4. The Lehman Brothers(R) Aggregate Bond Index is an unmanaged index that
consists of the following other unmanaged Lehman Brothers(R) Indices: the
Government Index, Corporate Index, Mortgage-Backed Securities Index and
Asset-Backed Securities Index. To qualify for inclusion in the Lehman
Brothers(R) Aggregate Bond Index, securities must be U.S. dollar denominated
and investment grade and have a fixed-coupon, a remaining maturity of at
least one year and a par amount outstanding of at least $250 million. Results
assume reinvestment of all income and capital gains. An investment cannot be
made directly in an index.
5. Lipper Inc. is an independent monitor of fund performance. Results are based
on total returns with all dividend and capital-gain distributions reinvested.
THE DISCLOSURE ON THE PRECEDING PAGE IS AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Total Return Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY TOTAL RETURN FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2007, to October 31, 2007,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1,
2007, to October 31, 2007.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six-months ended October 31, 2007. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/07 10/31/07 PERIOD(1) 10/31/07 PERIOD(1)
CLASS A SHARES $1,000.00 $1,049.85 $ 6.15 $1,019.05 $6.06
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,046.50 $10.01 $1,015.30 $9.85
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,046.00 $10.00 $1,015.30 $9.85
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,052.15 $ 4.19 $1,020.95 $4.13
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's net annualized expense ratio of each class
(1.19% for Class A, 1.94% for Class B and Class C, and 0.81% for Class I)
multiplied by the average account value over the period, divided by 365 and
multiplied by 184 (to reflect the one-half year period).
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2007
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 62.2
U.S. Government & Federal Agencies 22.1
Short-Term Investments (collateral from securities lending 13.6
is 10.9%)
Corporate Bonds 5.8
Foreign Bonds 2.3
Mortgage-Backed Securities 2.3
Asset-Backed Securities 1.7
Loan Assignments & Participations 0.3
Municipal Bonds 0.2
Yankee Bonds 0.1
Investment Companies 0.1
Warrants 0.0*
Convertible Preferred Stock 0.0*
Preferred Stock 0.0*
Convertible Bond 0.0*
Liabilities in Excess of Cash and Other Assets (10.7)
</Table>
* Less than one-tenth of a percent.
** Includes 10.9% of Short-Term Investment Company securities.
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2007 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. United States Treasury Note, 4.75%, due 8/15/17
2. Federal National Mortgage Association (Mortgage
Pass-Through Security), 5.50%, due 6/1/33
3. Microsoft Corp.
4. Apple, Inc.
5. Federal National Mortgage Association, 6.25%,
due 2/1/11
6. Southern Copper Corp.
7. Federal Home Loan Mortgage Corporation (Mortgage
Pass-Through Security), 5.50%, due 7/1/34
8. United States Treasury Note, 4.875%, due 7/31/11
9. PNC Financial Services Group, Inc.
10. Intel Corp.
</Table>
8 MainStay Total Return Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Edmund C. Spelman, Richard A. Rosen,
CFA, Joseph Portera and Gary Goodenough of MacKay Shields LLC
HOW DID MAINSTAY TOTAL RETURN FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2007?
Excluding all sales charges, MainStay Total Return Fund returned 12.18% for
Class A shares, 11.37% for Class B shares and 11.33% for Class C shares for the
12 months ended October 31, 2007. Over the same period, the Fund's Class I
shares returned 12.65%. All share classes underperformed the 13.51% return of
the average Lipper(1) mixed-asset target allocation growth fund and the 15.03%
return of the Russell 1000(R) Index(2) for the 12 months ended October 31, 2007.
The Russell 1000(R) Index is the Fund's broad-based securities-market index. See
pages 5 and 6 for Fund returns with sales charges.
DURING THE REPORTING PERIOD, WHICH SECTORS IN THE EQUITY PORTION OF THE FUND
WERE THE STRONGEST PERFORMERS AND WHICH SECTORS WERE PARTICULARLY WEAK?
Effective stock selection in the energy, materials and financials sectors made
the greatest positive contributions to the Fund's results relative to the
Russell 1000(R) Index. The equity sectors that detracted the most from the
Fund's relative performance were consumer discretionary and industrials.
DURING THE REPORTING PERIOD, WHICH STOCKS WERE THE STRONGEST CONTRIBUTORS TO THE
FUND'S PERFORMANCE AND WHICH STOCKS DETRACTED?
During the reporting period, we established a new position in Southern Copper,
which produces copper and operates mining, smelting and refining facilities, and
a new position in National Oilwell Varco, an exploration and production services
and equipment company that experienced increased demand largely because of
rising oil prices. Both of these stocks were among the strongest contributors to
the Fund's performance. Apple, another major contributor, benefited from strong
sales of its existing products and from the company's entry into the cellular
phone handset market.
Financial services and retail holdings were the greatest detractors from
performance in the equity portion of the Fund. First Marblehead, which provides
services for private education loans, saw its share price decline as investors
worried about deterioration in the credit markets and new entrants into the
education-loan market. Merrill Lynch shares declined because of the company's
exposure to collateralized debt obligations and mortgage-backed securities. J.C.
Penney's shares fell on weaker-than-expected sales and on growing concerns about
consumer spending.
WERE THERE ANY SIGNIFICANT EQUITY PURCHASES OR SALES DURING THE REPORTING
PERIOD?
Strong performers Southern Copper and National Oilwell Varco were the most
significant additions during the reporting period. The Fund also initiated a
position in oil sands producer Suncor Energy during the reporting period, and it
advanced from the time of purchase through the end of October 2007.
We eliminated the Fund's positions in a number of industrials stocks, such as
Danaher, which designs and manufactures industrial and consumer products;
Federal Express, a worldwide express delivery company; and United Technologies,
which provides high-technology products and support services to customers in the
aerospace and building industries. We also eliminated some of the Fund's retail
holdings, including a sizeable position in home-improvement retailer Lowe's.
High-yield securities ("junk bonds") are generally considered speculative
because they present a greater risk of loss than higher- quality debt securities
and may be subject to greater price volatility. The Fund may invest in
derivatives, which may increase the volatility of the Fund's net asset value and
may result in a loss to the Fund. The principal risk of investing in value
stocks is that they may never reach what the portfolio manager believes is their
full value or that they may even go down in value. The principal risk of growth
stocks is that investors expect growth companies to increase their earnings at a
certain rate that is generally higher than the rate expected for nongrowth
companies. If these expectations are not met, the market price of the stock may
decline significantly, even if earnings showed an absolute increase. The Fund
may experience a portfolio turnover rate of more than 100% and may generate
taxable short-term capital gains. Funds that invest in bonds are subject to
credit, inflation and interest-rate risk and can lose principal value when
interest rates rise.
1. See footnote on page 6 for more information on Lipper Inc.
2. See footnote on page 6 for more information on the Russell 1000(R) Index.
www.mainstayfunds.com 9
HOW DID YOU POSITION THE BOND PORTION OF THE FUND DURING THE REPORTING PERIOD?
With home prices no longer rising and with mortgage-lending standards
tightening, a substantial rise in mortgage defaults appeared inevitable. Leaders
in the packaging of subprime mortgages into collateralized debt obligations,
such as Lehman Brothers and Bear Stearns, saw their corporate bond spreads(3)
widen dramatically. These firms were soon joined by other financial behemoths,
such as Merrill Lynch and Citigroup. Fortunately, the Fund's exposure to
corporate bonds of these financial services companies was quite modest. These
bonds also had minimal impact on the Fund's performance owing to their short
duration(4) and their fixed-rate structure. Adjustable-rate collateral was the
hardest hit segment of the debt market during the reporting period, as the
expectation of higher delinquencies pushed interest rates on these mortgage
securities upward. The Fund had minimal exposure to adjustable-rate collateral,
so there was no negative impact on the Fund.
DID THE FUND'S BOND SECTOR WEIGHTINGS CHANGE DURING THE REPORTING PERIOD?
The Fund benefited from the decision to reduce exposure to investment-grade
credit early in July, as well as the Fund's holdings in convertible bonds. The
Fund's convertible bond holdings had rallied strongly on the back of U.S.
equity-market performance during the first part of the reporting period.
However, sensing headwinds blowing toward risky assets, we later sold the Fund's
convertible bonds and corporate debentures in favor of U.S. Treasury securities
and cash. In doing so, we not only increased the Fund's weighting in Treasurys,
but we also slightly increased the duration of the bond portion of the Fund.
This modestly longer duration helped the Fund's performance. During the
reporting period, we modestly reduced the Fund's weighting in emerging-market
bonds. Still, the Fund maintained an overweight position in emerging-market
bonds, which boosted the Fund's relative performance.
3. The terms "spread" and "yield spread" may refer to the difference in yield
between a security or type of security and comparable U.S. Treasury issues.
The term may also refer to the difference in yield between two specific
securities or types of securities at a given time.
4. Duration is a measure of the price sensitivity of a fixed-income investment
to changes in interest rates. Duration is expressed as a number of years and
is considered a more accurate sensitivity gauge than average maturity.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecast
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
10 MainStay Total Return Fund
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2007
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (34.8%)+
ASSET-BACKED SECURITIES (1.7%)
- ----------------------------------------------------------------------------
AUTOMOBILE (0.0%)++
Superior Wholesale Inventory Financing Trust
Series 2007-AE1, Class A
5.191%, due 1/15/12 (a) $ 340,000 $ 336,732
------------
CONSUMER FINANCE (0.4%)
Harley-Davidson Motorcycle Trust Series 2004-1,
Class A2
2.53%, due 11/15/11 1,358,977 1,334,994
Series 2007-1, Class A3
5.22%, due 3/15/12 1,225,000 1,231,915
------------
2,566,909
------------
CONSUMER LOANS (0.2%)
Atlantic City Electric Transition Funding LLC
Series 2002-1, Class A4
5.55%, due 10/20/23 1,600,000 1,579,125
------------
CREDIT CARDS (0.4%)
Chase Issuance Trust
Series 2006-C4, Class C4
5.381%, due 1/15/14 (a) 1,315,000 1,270,313
Citibank Credit Card Issuance Trust Series
2006-C4, Class C4
5.345%, due 1/9/12 (a) 1,400,000 1,369,907
------------
2,640,220
------------
DIVERSIFIED FINANCIAL SERVICES (0.5%)
Bank of America Credit Card Trust Series 2006-C4,
Class C4
5.321%, due 11/15/11 (a) 745,000 733,449
Dominos Pizza Master Issuer LLC
Series 2007-1, Class A2
5.261%, due 4/25/37 (b) 880,000 875,066
Dunkin Securitization
Series 2006-1, Class A2
5.779%, due 6/20/31 (b) 630,000 634,891
Murcie Lago International, Ltd.
Series 2006-1X, Class A
5.359%, due 3/27/11 (a)(c) 700,000 696,073
USXL Funding LLC
Series 2006-1A, Class A
5.379%, due 4/15/14 (b) 449,364 449,869
------------
3,389,348
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
HOME EQUITY (0.2%)
Citicorp Residential Mortgage Securities, Inc.
Series 2006-3, Class A3
5.61%, due 11/25/36 (d) $ 495,000 $ 484,583
Series 2006-1, Class A3
5.706%, due 7/25/36 (d) 855,000 841,329
------------
1,325,912
------------
Total Asset-Backed Securities
(Cost $11,993,704) 11,838,246
------------
CONVERTIBLE BOND (0.0%)++
- ----------------------------------------------------------------------------
INSURANCE (0.0%)++
Conseco, Inc.
3.50%, due 9/30/35
(zero coupon), beginning 9/30/10 20,000 18,450
------------
Total Convertible Bond
(Cost $20,200) 18,450
------------
CORPORATE BONDS (5.8%)
- ----------------------------------------------------------------------------
ADVERTISING (0.0%)++
Lamar Media Corp.
6.625%, due 8/15/15 120,000 115,200
------------
AEROSPACE & DEFENSE (0.1%)
Sequa Corp.
8.875%, due 4/1/08 95,000 96,069
United Technologies Corp.
5.40%, due 5/1/35 450,000 423,938
------------
520,007
------------
AGRICULTURE (0.0%)++
Reynolds American, Inc.
7.625%, due 6/1/16 45,000 48,686
------------
AIRLINES (0.0%)++
Delta Air Lines, Inc.
8.00%, due 6/3/23 (o) 40,000 2,652
10.375%, due 12/15/22 (o) 100,000 6,375
Northwest Airlines, Inc.
7.625%, due 11/15/23 (o) 42,700 2,084
8.875%, due 6/1/08 (o) 30,000 1,313
10.00%, due 2/1/09 (o) 17,300 735
------------
13,159
------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ----------------------------------------------------------------------------
APPAREL (0.0%)++
Quiksilver, Inc.
6.875%, due 4/15/15 $ 75,000 $ 69,938
------------
AUTO MANUFACTURERS (0.1%)
DaimlerChrysler N.A. Holding Corp.
5.75%, due 5/18/09 690,000 696,799
------------
AUTO PARTS & EQUIPMENT (0.1%)
FleetPride Corp.
11.50%, due 10/1/14 (b) 140,000 140,000
Goodyear Tire & Rubber Co. (The)
8.625%, due 12/1/11 68,000 72,420
11.25%, due 3/1/11 80,000 85,600
Lear Corp.
Series B
8.50%, due 12/1/13 65,000 63,294
8.75%, due 12/1/16 55,000 52,800
Tenneco Automotive, Inc.
8.625%, due 11/15/14 (e) 80,000 81,600
------------
495,714
------------
BANKS (0.2%)
HSBC Bank USA N.A.
4.625%, due 4/1/14 1,005,000 945,714
USB Capital IX
6.189%, due 4/15/11 (a) 200,000 201,641
------------
1,147,355
------------
BEVERAGES (0.0%)++
Constellation Brands, Inc.
7.25%, due 5/15/17 (b) 95,000 94,762
------------
BUILDING MATERIALS (0.1%)
USG Corp.
6.30%, due 11/15/16 1,105,000 1,010,997
------------
CHEMICALS (0.1%)
Equistar Chemicals, L.P.
7.55%, due 2/15/26 90,000 79,650
MacDermid, Inc.
9.50%, due 4/15/17 (b) 70,000 66,850
Millennium America, Inc.
7.625%, due 11/15/26 110,000 94,600
Mosaic Global Holdings, Inc.
7.375%, due 12/1/14 (b) 80,000 84,600
7.625%, due 12/1/16 (b) 95,000 102,362
Phibro Animal Health Corp.
10.00%, due 8/1/13 (b) 80,000 82,200
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CHEMICALS (CONTINUED)
Tronox Worldwide LLC/Tronox
Finance Corp.
9.50%, due 12/1/12 $ 100,000 $ 96,500
------------
606,762
------------
COAL (0.0%)++
Peabody Energy Corp.
7.375%, due 11/1/16 70,000 72,800
7.875%, due 11/1/26 120,000 125,400
------------
198,200
------------
COMMERCIAL SERVICES (0.0%)++
Cardtronics, Inc.
9.25%, due 8/15/13 120,000 115,800
9.25%, due 8/15/13 (b) 50,000 48,250
Service Corp. International
7.375%, due 10/1/14 55,000 56,238
7.625%, due 10/1/18 55,000 56,375
------------
276,663
------------
COMPUTERS (0.0%)++
International Business Machines Corp.
5.70%, due 9/14/17 100,000 101,499
SunGard Data Systems, Inc.
3.75%, due 1/15/09 55,000 53,625
------------
155,124
------------
DISTRIBUTION & WHOLESALE (0.0%)++
Varietal Distribution Merger Sub, Inc.
10.25%, due 7/15/15 (b)(f) 155,000 151,900
------------
DIVERSIFIED FINANCIAL SERVICES (1.2%)
American Real Estate Partners, L.P./ American Real
Estate Finance Corp.
8.125%, due 6/1/12 305,000 307,288
AmeriCredit Corp.
8.50%, due 7/1/15 (b) 95,000 85,025
Bear Stearns Cos., Inc. (The)
2.875%, due 7/2/08 1,100,000 1,080,711
Citigroup, Inc.
5.00%, due 9/15/14 1,765,000 1,713,172
Ford Motor Credit Co. LLC
7.375%, due 10/28/09 70,000 67,512
7.875%, due 6/15/10 3,000 2,892
General Electric Capital Corp.
5.625%, due 9/15/17 250,000 252,437
General Motors Acceptance Corp. LLC
5.85%, due 1/14/09 435,000 419,742
6.625%, due 5/15/12 700,000 628,412
6.75%, due 12/1/14 70,000 62,027
8.00%, due 11/1/31 344,000 317,965
Goldman Sachs Group, L.P.
5.00%, due 10/1/14 790,000 762,706
</Table>
12 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ----------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (CONTINUED)
Hawker Beechcraft Acquisition Co. LLC/ Hawker
Beechcraft Co.
8.50%, due 4/1/15 (b) $ 65,000 $ 66,138
9.75%, due 4/1/17 (b) 25,000 25,437
HSBC Finance Corp.
4.75%, due 4/15/10 760,000 751,229
Idearc, Inc.
8.00%, due 11/15/16 160,000 160,400
LaBranche & Co., Inc.
11.00%, due 5/15/12 30,000 29,700
NSG Holdings LLC/NSG Holdings, Inc.
7.75%, due 12/15/25 (b) 55,000 54,450
OMX Timber Finance Investments LLC
Series 1
5.42%, due 1/29/20 (b) 350,000 344,554
Rainbow National Services LLC
8.75%, due 9/1/12 (b) 75,000 78,000
Regency Energy Partners/Regency Energy Finance
Corp.
8.375%, due 12/15/13 81,000 85,253
Residential Capital Corp.
6.50%, due 4/17/13 685,000 500,050
------------
7,795,100
------------
ELECTRIC (0.3%)
AES Eastern Energy, L.P.
Series 1999-A
9.00%, due 1/2/17 116,005 125,575
Calpine Corp.
8.50%, due 7/15/10 (b) 63,000 67,410
Consumers Energy Co.
Series F
4.00%, due 5/15/10 1,260,000 1,230,147
NRG Energy, Inc.
7.25%, due 2/1/14 15,000 15,000
7.375%, due 2/1/16 30,000 29,925
Reliant Energy Mid-Atlantic Power Holdings LLC
Series C
9.681%, due 7/2/26 90,000 103,950
Reliant Energy, Inc.
7.625%, due 6/15/14 25,000 25,219
7.875%, due 6/15/17 215,000 216,881
------------
1,814,107
------------
ELECTRICAL COMPONENTS & EQUIPMENT (0.0%)++
Belden, Inc.
7.00%, due 3/15/17 90,000 91,350
------------
ENERGY--ALTERNATE SOURCES (0.0%)++
VeraSun Energy Corp.
9.375%, due 6/1/17 (b) 90,000 74,025
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
ENTERTAINMENT (0.2%)
American Casino & Entertainment
7.85%, due 2/1/12 $ 85,000 $ 88,081
Gaylord Entertainment Co.
6.75%, due 11/15/14 85,000 82,450
8.00%, due 11/15/13 120,000 122,100
Jacobs Entertainment, Inc.
9.75%, due 6/15/14 70,000 70,700
Mohegan Tribal Gaming Authority
6.375%, due 7/15/09 60,000 59,400
7.125%, due 8/15/14 50,000 49,000
8.00%, due 4/1/12 65,000 66,381
Penn National Gaming, Inc.
6.75%, due 3/1/15 180,000 184,500
Shingle Springs Tribal Gaming Authority
9.375%, due 6/15/15 (b) 90,000 90,450
Speedway Motorsports, Inc.
6.75%, due 6/1/13 175,000 172,813
Vail Resorts, Inc.
6.75%, due 2/15/14 180,000 177,750
------------
1,163,625
------------
ENVIRONMENTAL CONTROL (0.0%)++
Geo Sub Corp.
11.00%, due 5/15/12 60,000 61,500
------------
FOOD (0.2%)
Corn Products International, Inc.
6.00%, due 4/15/17 800,000 806,271
Pilgrims Pride Corp.
7.625%, due 5/1/15 20,000 20,100
8.375%, due 5/1/17 (e) 30,000 30,225
Smithfield Foods, Inc.
7.75%, due 7/1/17 100,000 103,000
Stater Brothers Holdings
7.75%, due 4/15/15 105,000 104,738
------------
1,064,334
------------
FOREST PRODUCTS & PAPER (0.1%)
Bowater, Inc.
9.375%, due 12/15/21 250,000 208,750
Georgia-Pacific Corp.
7.00%, due 1/15/15 (b) 150,000 147,000
7.125%, due 1/15/17 (b) 305,000 297,375
7.75%, due 11/15/29 5,000 4,775
8.00%, due 1/15/24 20,000 19,700
8.875%, due 5/15/31 30,000 30,000
Neenah Paper, Inc.
7.375%, due 11/15/14 90,000 86,850
------------
794,450
------------
HAND & MACHINE TOOLS (0.0%)++
Baldor Electric Co.
8.625%, due 2/15/17 90,000 93,825
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ----------------------------------------------------------------------------
HEALTH CARE-PRODUCTS (0.1%)
Cooper Cos., Inc. (The)
7.125%, due 2/15/15 $ 70,000 $ 69,300
Invacare Corp.
9.75%, due 2/15/15 110,000 111,925
PTS Acquisition Corp.
9.50%, due 4/15/15 (b)(f) 145,000 139,925
Universal Hospital Services, Inc.
8.50%, due 6/1/15 (b)(f) 40,000 40,700
8.759%, due 6/1/15 (a)(b) 40,000 40,100
------------
401,950
------------
HEALTH CARE-SERVICES (0.1%)
Alliance Imaging, Inc.
7.25%, due 12/15/12 40,000 38,200
Community Health Systems, Inc.
8.875%, due 7/15/15 (b) 215,000 217,688
HCA, Inc.
8.75%, due 9/1/10 135,000 137,362
Psychiatric Solutions, Inc.
7.75%, due 7/15/15 90,000 91,575
Sun Healthcare Group, Inc.
9.125%, due 4/15/15 70,000 71,925
------------
556,750
------------
HOLDING COMPANIES--DIVERSIFIED (0.0%)++
Susser Holdings LLC
10.625%, due 12/15/13 65,000 67,600
------------
HOUSEHOLD PRODUCTS & WARES (0.0%)++
Jarden Corp.
7.50%, due 5/1/17 75,000 71,250
Libbey Glass, Inc.
12.385%, due 6/1/11 (a) 80,000 87,000
------------
158,250
------------
INSURANCE (0.2%)
Crum & Forster Holdings Corp.
7.75%, due 5/1/17 215,000 213,387
Fund American Cos., Inc.
5.875%, due 5/15/13 595,000 588,973
HUB International Holdings, Inc.
9.00%, due 12/15/14 (b) 195,000 187,200
USI Holdings Corp.
9.433%, due 11/15/14 (a)(b) 35,000 32,550
9.75%, due 5/15/15 (b) 95,000 83,837
------------
1,105,947
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LODGING (0.1%)
Boyd Gaming Corp.
7.125%, due 2/1/16 $ 55,000 $ 53,488
7.75%, due 12/15/12 170,000 175,100
MGM Mirage, Inc.
7.50%, due 6/1/16 50,000 49,687
8.50%, due 9/15/10 115,000 120,319
MTR Gaming Group, Inc.
Series B
9.00%, due 6/1/12 35,000 35,000
9.75%, due 4/1/10 135,000 138,375
Park Place Entertainment Corp.
7.00%, due 4/15/13 170,000 177,650
Seminole Hard Rock Entertainment, Inc./ Seminole
Hard Rock International LLC
8.194%, due 3/15/14 (a)(b) 85,000 83,087
Wynn Las Vegas LLC
6.625%, due 12/1/14 70,000 68,775
------------
901,481
------------
MACHINERY--CONSTRUCTION & MINING (0.1%)
Caterpillar, Inc.
6.05%, due 8/15/36 825,000 839,646
------------
MEDIA (0.3%)
Houghton Mifflin Co.
7.20%, due 3/15/11 75,000 73,875
Morris Publishing Group LLC
7.00%, due 8/1/13 75,000 57,562
News America Holdings, Inc.
8.00%, due 10/17/16 665,000 762,657
Paxson Communications Corp.
8.493%, due 1/15/12 (a)(b) 30,000 30,075
11.493%, due 1/15/13 (a)(b) 55,000 55,962
Time Warner Cable, Inc.
5.85%, due 5/1/17 (b) 790,000 783,257
Ziff Davis Media, Inc.
11.356%, due 5/1/12 (a) 70,000 67,200
------------
1,830,588
------------
METAL FABRICATE & HARDWARE (0.0%)++
Mueller Water Products, Inc.
7.375%, due 6/1/17 90,000 83,700
Neenah Foundary Co.
9.50%, due 1/1/17 130,000 119,600
------------
203,300
------------
MINING (0.1%)
Alcoa, Inc.
5.90%, due 2/1/27 700,000 663,727
Freeport-McMoRan Copper & Gold, Inc.
8.25%, due 4/1/15 55,000 59,400
8.375%, due 4/1/17 110,000 120,450
------------
843,577
------------
</Table>
14 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ----------------------------------------------------------------------------
MISCELLANEOUS--MANUFACTURING (0.0%)++
Actuant Corp.
6.875%, due 6/15/17 (b) $ 85,000 $ 85,000
RBS Global, Inc./Rexnord Corp.
9.50%, due 8/1/14 125,000 129,063
------------
214,063
------------
OFFICE & BUSINESS EQUIPMENT (0.2%)
Xerox Corp.
7.625%, due 6/15/13 1,055,000 1,096,818
------------
OIL & GAS (0.4%)
Chaparral Energy, Inc.
8.50%, due 12/1/15 130,000 121,225
Chesapeake Energy Corp.
6.50%, due 8/15/17 135,000 130,275
6.875%, due 11/15/20 5,000 4,888
Energy Partners, Ltd.
10.368%, due 4/15/13 (a)(b) 90,000 90,675
Forest Oil Corp.
7.25%, due 6/15/19 (b) 125,000 125,000
Gazprom International S.A.
7.201%, due 2/1/20 (b) 657,143 675,214
Hilcorp Energy I, L.P./Hilcorp Finance Co.
9.00%, due 6/1/16 (b)(e) 60,000 62,250
Newfield Exploration Co.
6.625%, due 9/1/14 60,000 58,950
6.625%, due 4/15/16 110,000 107,800
Pemex Project Funding Master Trust 5.75%, due
3/1/18 (b) 315,000 317,677
6.625%, due 6/15/35 315,000 336,735
Pogo Producing Co.
6.625%, due 3/15/15 65,000 65,650
6.875%, due 10/1/17 190,000 192,375
Pride International, Inc.
7.375%, due 7/15/14 35,000 35,875
Stone Energy Corp.
6.75%, due 12/15/14 80,000 73,900
Whiting Petroleum Corp.
7.00%, due 2/1/14 135,000 132,806
7.25%, due 5/1/13 55,000 54,038
------------
2,585,333
------------
OIL & GAS SERVICES (0.0%)++
Allis-Chalmers Energy, Inc.
8.50%, due 3/1/17 135,000 131,963
9.00%, due 1/15/14 40,000 40,500
Complete Production Services, Inc.
8.00%, due 12/15/16 170,000 164,900
------------
337,363
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
PACKAGING & CONTAINERS (0.0%)++
Owens-Brockway Glass Container, Inc.
8.75%, due 11/15/12 $ 5,000 $ 5,219
------------
PHARMACEUTICALS (0.3%)
Eli Lilly & Co.
5.55%, due 3/15/37 400,000 381,951
Medco Health Solutions, Inc.
7.25%, due 8/15/13 1,180,000 1,248,399
NBTY, Inc.
7.125%, due 10/1/15 70,000 69,300
------------
1,699,650
------------
PIPELINES (0.1%)
ANR Pipeline Co.
9.625%, due 11/1/21 55,000 74,847
Copano Energy LLC
8.125%, due 3/1/16 70,000 71,925
El Paso Natural Gas Co.
7.50%, due 11/15/26 95,000 100,902
MarkWest Energy Partners, L.P./ MarkWest Energy
Finance Corp.
Series B
6.875%, due 11/1/14 125,000 116,875
8.50%, due 7/15/16 15,000 15,000
Pacific Energy Partners, L.P./Pacific Energy
Finance Corp.
7.125%, due 6/15/14 70,000 72,325
------------
451,874
------------
REAL ESTATE INVESTMENT TRUSTS (0.1%)
American Real Estate Partners, L.P./ American Real
Estate Finance Corp.
7.125%, due 2/15/13 (b) 250,000 243,750
Health Care Property Investors, Inc.
6.00%, due 1/30/17 450,000 434,200
Host Marriott, L.P.
6.375%, due 3/15/15 145,000 143,187
Series Q
6.75%, due 6/1/16 35,000 35,000
Omega Healthcare Investors, Inc.
7.00%, due 4/1/14 75,000 75,563
------------
931,700
------------
RETAIL (0.3%)
CVS Caremark Corp.
5.789%, due 1/10/26 (b) 311,568 310,169
Rite Aid Corp.
7.50%, due 1/15/15 165,000 156,750
7.50%, due 3/1/17 100,000 93,000
8.625%, due 3/1/15 150,000 133,125
9.375%, due 12/15/15 (b) 65,000 59,963
9.50%, due 6/15/17 (b) 80,000 74,000
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ----------------------------------------------------------------------------
RETAIL (CONTINUED)
Star Gas Partners, L.P./Star Gas Finance Co.
Series B
10.25%, due 2/15/13 $ 22,000 $ 22,935
Toys "R" Us, Inc.
7.625%, due 8/1/11 40,000 35,800
Wal-Mart Stores, Inc.
4.50%, due 7/1/15 50,000 47,276
6.50%, due 8/15/37 815,000 857,122
------------
1,790,140
------------
SAVINGS & LOANS (0.2%)
Washington Mutual Bank
5.95%, due 5/20/13 1,375,000 1,309,164
------------
TELECOMMUNICATIONS (0.3%)
Dobson Cellular Systems, Inc.
8.375%, due 11/1/11 35,000 37,100
Series B
8.375%, due 11/1/11 35,000 37,100
GCI, Inc.
7.25%, due 2/15/14 85,000 77,669
Intelsat Corp.
9.00%, due 6/15/16 90,000 92,025
iPCS, Inc.
7.481%, due 5/1/13 (a) 35,000 34,125
Lucent Technologies, Inc.
6.45%, due 3/15/29 530,000 442,550
Nextel Communications, Inc.
Series D
7.375%, due 8/1/15 300,000 303,000
PAETEC Holding Corp.
9.50%, due 7/15/15 (b) 70,000 71,750
PanAmSat Corp.
9.00%, due 8/15/14 37,000 37,740
Qwest Communications International, Inc.
7.25%, due 2/15/11 70,000 70,700
Qwest Corp.
7.125%, due 11/15/43 20,000 18,800
7.25%, due 9/15/25 45,000 44,775
7.50%, due 10/1/14 145,000 151,344
8.875%, due 3/15/12 30,000 32,850
Sprint Nextel Corp.
6.00%, due 12/1/16 475,000 456,717
------------
1,908,245
------------
TEXTILES (0.0%)++
INVISTA
9.25%, due 5/1/12 (b) 80,000 84,400
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TRANSPORTATION (0.2%)
Atlantic Express Transportation Corp.
12.455%, due 4/15/12 (a) $ 70,000 $ 67,200
St. Acquisition Corp.
12.50%, due 5/15/17 (b)(e) 75,000 47,812
Union Pacific Corp.
3.625%, due 6/1/10 1,000,000 967,298
------------
1,082,310
------------
TRUCKING & LEASING (0.0%)++
Greenbrier Cos., Inc.
8.375%, due 5/15/15 85,000 84,044
------------
Total Corporate Bonds
(Cost $39,688,930) 39,042,994
------------
FOREIGN BONDS (2.3%)
- ----------------------------------------------------------------------------
BANKS (0.1%)
ATF Capital B.V.
9.25%, due 2/21/14 (b) 460,000 473,800
------------
BEVERAGES (0.1%)
Coca-Cola HBC Finance B.V.
5.125%, due 9/17/13 430,000 420,370
------------
BUILDING MATERIALS (0.1%)
Asia Aluminum Holdings, Ltd.
8.00%, due 12/23/11 (b) 645,000 626,489
------------
COMMERCIAL SERVICES (0.0%)++
Quebecor World, Inc.
9.75%, due 1/15/15 (b) 185,000 180,375
------------
DIVERSIFIED FINANCIAL SERVICES (0.3%)
Cosan Finance, Ltd.
7.00%, due 2/1/17 (b) 330,000 317,625
Lukoil International Finance B.V.
6.356%, due 6/7/17 (b) 1,180,000 1,135,750
TNK-BP Finance S.A.
7.50%, due 7/18/16 (b) 470,000 458,250
------------
1,911,625
------------
ELECTRIC (0.1%)
Intergen N.V.
9.00%, due 6/30/17 (b) 215,000 227,363
SP PowerAssets, Ltd.
5.00%, due 10/22/13 (b) 625,000 603,983
------------
831,346
------------
</Table>
16 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FOREIGN BONDS (CONTINUED)
- ----------------------------------------------------------------------------
ELECTRONICS (0.1%)
NXP B.V./NXP Funding LLC
7.875%, due 10/15/14 $ 265,000 $ 258,706
9.50%, due 10/15/15 75,000 70,875
------------
329,581
------------
FOOD (0.0%)++
Grupo Gigante S.A. de C.V.
8.75%, due 4/13/16 (b)(e) 305,000 317,200
------------
FOREIGN SOVEREIGN (0.3%)
Republic of Argentina
8.28%, due 12/31/33 553,777 560,699
Republic of Panama
7.125%, due 1/29/26 1,000,000 1,102,500
United Mexican States
8.125%, due 12/30/19 495,000 611,820
------------
2,275,019
------------
FOREST PRODUCTS & PAPER (0.0%)++
Bowater Canada Finance
7.95%, due 11/15/11 20,000 17,150
Catalyst Paper Corp.
7.375%, due 3/1/14 100,000 73,250
------------
90,400
------------
HEALTH CARE-PRODUCTS (0.0%)++
FMC Finance III S.A.
6.875%, due 7/15/17 (b) 220,000 220,550
------------
HOLDING COMPANIES--DIVERSIFIED (0.1%)
Hutchison Whampoa International, Ltd.
6.50%, due 2/13/13 (b) 650,000 680,176
------------
HOUSEHOLD PRODUCTS & WARES (0.1%)
Controladora Mabe S.A. de C.V.
6.50%, due 12/15/15 (b) 205,000 208,075
6.50%, due 12/15/15 300,000 304,500
------------
512,575
------------
INSURANCE (0.1%)
Nippon Life Insurance Co.
4.875%, due 8/9/10 (b) 340,000 337,492
------------
MEDIA (0.2%)
BSKYB Finance UK PLC
6.50%, due 10/15/35 (b) 1,130,000 1,107,426
CanWest MediaWorks, Inc.
8.00%, due 9/15/12 41,000 39,975
CanWest MediaWorks, L.P.
9.25%, due 8/1/15 (b) 120,000 121,800
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MEDIA (CONTINUED)
Quebecor Media, Inc.
7.75%, due 3/15/16 $ 15,000 $ 14,513
Videotron Ltee
6.375%, due 12/15/15 75,000 72,375
------------
1,356,089
------------
MINING (0.1%)
Corporacion Nacional del
Cobre-Codelco, Inc.
4.75%, due 10/15/14 (b) 557,000 529,220
Vale Overseas, Ltd.
6.875%, due 11/21/36 85,000 88,361
8.25%, due 1/17/34 310,000 372,070
------------
989,651
------------
MISCELLANEOUS--MANUFACTURING (0.2%)
Covidien International Finance S.A.
6.00%, due 10/15/17 (b) 560,000 567,548
Siemens Financieringsmaatschappij N.V.
6.125%, due 8/17/26 (b) 700,000 706,708
------------
1,274,256
------------
OIL & GAS (0.2%)
Citic Resources Finance, Ltd.
6.75%, due 5/15/14 (b) 200,000 192,000
Ras Laffan Liquefied Natural
Gas Co., Ltd. III
6.332%, due 9/30/27 (b) 1,510,000 1,488,649
------------
1,680,649
------------
PHARMACEUTICALS (0.0%)++
Angiotech Pharmaceuticals, Inc.
9.371%, due 12/1/13 (a) 60,000 59,400
------------
TELECOMMUNICATIONS (0.2%)
Millicom International Cellular S.A.
10.00%, due 12/1/13 65,000 69,956
Nortel Networks, Ltd.
10.75%, due 7/15/16 (b) 70,000 72,975
Rogers Wireless, Inc.
9.625%, due 5/1/11 275,000 309,065
Satelites Mexicanos S.A. de C.V.
13.948%, due 11/30/11 (a) 85,000 87,975
Telefonos de Mexico S.A. de C.V.
5.50%, due 1/27/15 690,000 681,375
------------
1,221,346
------------
TRANSPORTATION (0.0%)++
Kansas City Southern de Mexico
S.A. de C.V.
7.375%, due 6/1/14 (b) 30,000 30,000
------------
Total Foreign Bonds
(Cost $15,933,416) 15,818,389
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 17
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LOAN ASSIGNMENTS & PARTICIPATIONS (0.3%)(G)
- ----------------------------------------------------------------------------
CHEMICALS (0.0%)++
Talecris Biotherapeutics, Inc.
2nd Lien Term Loan
11.86%, due 12/6/14 $ 115,000 $ 115,000
------------
HEALTH CARE-SERVICES (0.1%)
Community Health Systems, Inc.
New Term Loan B
7.57%, due 7/25/14 195,000 190,247
HCA, Inc.
Term Loan B
7.61%, due 11/18/13 248,125 242,141
------------
432,388
------------
MEDIA (0.0%)++
Nielsen Finance LLC
Dollar Term Loan
7.61%, due 8/9/13 99,000 96,250
------------
MINING (0.0%)++
BHM Technologies LLC
1st Lien Term Loan
10.86%, due 7/21/13 176,936 151,723
------------
REAL ESTATE (0.1%)
Building Materials Corp. of America
2nd Lien Term Loan
11.13%, due 9/15/14 100,000 82,700
Green Valley Ranch Gaming LLC
1st Lien Term Loan B
7.36%, due 2/16/14 95,864 93,467
LNR Property Corp.
Initial Tranche B Term Loan
8.11%, due 7/12/11 210,000 204,435
Rental Services Corp.
2nd Lien Term Loan
8.86%, due 11/27/13 79,584 77,445
Riverdeep Interactive Learning USA, Inc.
Bridge Loan
12.06%, due 12/21/14 55,060 54,819
Town Sports International, Inc.
Term Loan
7.13%, due 2/27/14 99,500 94,028
Transfirst Holdings, Inc.
Term Loan B
8.11%, due 6/14/14 99,750 95,511
------------
702,405
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
RETAIL (0.1%)
Michaels Stores, Inc.
New Term Loan B
7.63%, due 10/31/13 $ 99,497 $ 95,088
Toys "R" Us (Delaware), Inc.
Term Loan
10.32%, due 1/19/13 140,000 140,029
------------
235,117
------------
Total Loan Assignments & Participations
(Cost $1,808,219) 1,732,883
------------
MORTGAGE-BACKED SECURITIES (2.3%)
- ----------------------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (2.3%)
Banc of America Commercial Mortgage, Inc.
Series 2005-5, Class A2
5.001%, due 10/10/45 1,175,000 1,168,923
Bayview Commercial Asset Trust Series 2006-4A,
Class A1
5.361%, due 12/25/36 (a)(b) 469,929 467,064
Citigroup Commercial Mortgage Trust Series
2004-C2, Class A5
4.733%, due 10/15/41 1,145,000 1,092,772
Citigroup/Deutsche Bank Commercial Mortgage Trust
Series 2005-CD1, Class A4
5.225%, due 7/15/44 990,000 973,733
Commercial Mortgage
Pass-Through Certificates
Series 2006-C7, Class A4
5.961%, due 6/10/46 (a) 700,000 710,693
Credit Suisse Mortgage
Capital Certificates
Series 2006-C4, Class AJ
5.538%, due 9/15/39 (a) 1,965,000 1,884,151
Four Times Square Trust
Series 2006-4TS, Class A
5.401%, due 12/13/28 (b) 860,000 824,724
Greenwich Capital Commercial Funding Corp.
Series 2006-GG7, Class A4
6.109%, due 7/10/38 (a) 425,000 435,465
LB-UBS Commercial Mortgage Trust Series 2004-C2,
Class A2
3.246%, due 3/15/29 1,555,000 1,520,736
Series 2004-C7, Class A1
3.625%, due 10/15/29 751,570 740,543
Series 2005-C7, Class A4
5.197%, due 11/15/30 1,173,000 1,144,165
Series 2006-C4, Class A4
5.883%, due 6/15/38 (a) 645,000 659,916
</Table>
18 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MORTGAGE-BACKED SECURITIES (CONTINUED)
- ----------------------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (CONTINUED)
Merrill Lynch Mortgage Trust Series 2004-MKB1,
Class A1
3.563%, due 2/12/42 $ 596,579 $ 589,392
Series 2004-BPC1, Class A5
4.855%, due 10/12/41 (a) 2,240,000 2,156,117
Mortgage Equity Conversion Asset Trust Series
2007-FF2, Class A
4.66%, due 2/25/42 (a)(b)(c) 830,000 803,282
Timberstar Trust
Series 2006-1, Class A
5.668%, due 10/15/36 (b)(c) 280,000 278,250
Wachovia Bank Commercial
Mortgage Trust
Series 2004-C14, Class A1
3.477%, due 8/15/41 254,167 250,387
------------
Total Mortgage-Backed Securities
(Cost $16,062,294) 15,700,313
------------
MUNICIPAL BONDS (0.2%)
- ----------------------------------------------------------------------------
TEXAS (0.1%)
Harris County Texas Industrial Development Corp.
Solid Waste Deer Park
5.683%, due 3/1/23 (a) 660,000 654,357
------------
WEST VIRGINIA (0.1%)
Tobacco Settlement Finance Authority of West
Virginia
7.467%, due 6/1/47 680,000 666,652
------------
Total Municipal Bonds
(Cost $1,340,000) 1,321,009
------------
U.S. GOVERNMENT & FEDERAL AGENCIES (22.1%)
- ----------------------------------------------------------------------------
FANNIE MAE (COLLATERALIZED MORTGAGE OBLIGATION) (0.1%)
Series 2006-B1, Class AB
6.00%, due 6/25/16 783,791 791,675
------------
FANNIE MAE GRANTOR TRUST
(COLLATERALIZED MORTGAGE OBLIGATION) (0.0%)++
Series 1998-M6, Class A2
6.32%, due 8/15/08 (h) 158,076 158,491
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FEDERAL HOME LOAN MORTGAGE CORPORATION
(MORTGAGE PASS-THROUGH SECURITIES) (3.4%)
3.00%, due 8/1/10 $ 518,423 $ 497,294
4.311%, due 3/1/35 (a) 1,468,414 1,448,942
5.00%, due 8/1/33 1,460,530 1,405,677
5.50%, due 1/1/21 6,689,865 6,701,628
V 5.50%, due 7/1/34 7,189,847 7,098,679
5.50%, due 1/1/36 1,436,796 1,416,066
5.50%, due 9/1/36 2,458,080 2,420,118
6.00%, due 3/1/36 2,238,351 2,254,929
------------
23,243,333
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (3.0%)
4.625%, due 5/1/13 5,715,000 5,661,708
5.125%, due 1/2/14 810,000 817,736
5.25%, due 8/1/12 2,425,000 2,471,669
V 6.25%, due 2/1/11 7,165,000 7,521,810
6.625%, due 9/15/09 3,845,000 4,001,284
------------
20,474,207
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (7.9%)
4.50%, due 4/1/18 1,105,106 1,072,017
4.50%, due 7/1/18 3,950,681 3,832,391
4.50%, due 11/1/18 5,113,635 4,960,525
5.00%, due 9/1/20 362,374 356,966
5.00%, due 10/1/20 366,378 360,910
5.00%, due 12/1/20 740,937 729,879
5.00%, due 7/1/35 5,777,552 5,550,930
5.00%, due 2/1/36 2,208,039 2,121,430
5.00%, due 5/1/36 2,567,509 2,466,799
5.00%, due 6/1/36 121,995 117,116
5.50%, due 4/1/21 3,680,793 3,688,461
5.50%, due 6/1/21 3,083,020 3,088,886
V 5.50%, due 6/1/33 8,797,920 8,694,444
5.50%, due 11/1/33 1,540,004 1,521,892
5.50%, due 12/1/33 1,322,362 1,306,809
5.50%, due 6/1/34 2,100,604 2,074,459
6.00%, due 1/1/33 999,489 1,011,407
6.00%, due 3/1/33 1,143,359 1,155,981
6.00%, due 9/1/34 1,113,938 1,124,594
6.00%, due 9/1/35 3,862,857 3,899,113
6.00%, due 10/1/35 2,669,738 2,692,284
6.50%, due 6/1/31 526,183 542,111
6.50%, due 8/1/31 418,003 430,656
6.50%, due 10/1/31 278,962 287,406
------------
53,087,466
------------
FREDDIE MAC (COLLATERALIZED MORTGAGE OBLIGATION) (0.1%)
Series 2632, Class NH
3.50%, due 6/15/13 853,980 825,635
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 19
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
- ----------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (1.0%)
5.00%, due 3/15/36 $2,285,967 $ 2,218,875
5.00%, due 6/15/36 1,525,838 1,481,016
6.00%, due 4/15/29 1,172,414 1,191,467
6.00%, due 8/15/32 1,748,559 1,775,389
------------
6,666,747
------------
UNITED STATES TREASURY BONDS (1.2%)
6.00%, due 2/15/26 335,000 383,575
6.25%, due 8/15/23 1,700,000 1,973,063
6.25%, due 5/15/30 4,340,000 5,218,511
6.875%, due 8/15/25 125,000 155,752
------------
7,730,901
------------
UNITED STATES TREASURY NOTES (5.4%)
3.875%, due 9/15/10 (e) 5,255,000 5,244,737
3.875%, due 2/15/13 (e) 80,000 78,938
4.125%, due 8/31/12 (e) 5,440,000 5,434,473
4.75%, due 5/31/12 (e) 5,660,000 5,807,251
V 4.75%, due 8/15/17 (e) 12,695,000 12,974,684
V 4.875%, due 7/31/11 (e) 6,790,000 6,986,801
------------
36,526,884
------------
Total U.S. Government & Federal Agencies
(Cost $148,806,272) 149,505,339
------------
YANKEE BONDS (0.1%)(I)
- ----------------------------------------------------------------------------
FOREST PRODUCTS & PAPER (0.0%)++
Smurfit Capital Funding PLC
7.50%, due 11/20/25 185,000 179,450
------------
INSURANCE (0.0%)++
Fairfax Financial Holdings, Ltd.
7.375%, due 4/15/18 (e) 35,000 32,550
8.30%, due 4/15/26 (e) 20,000 19,100
------------
51,650
------------
PIPELINES (0.1%)
TransCanada Pipelines, Ltd.
6.35%, due 5/15/67 (a) 385,000 372,488
------------
Total Yankee Bonds
(Cost $600,642) 603,588
------------
Total Long-Term Bonds
(Cost $236,253,677) 235,581,211
------------
<Caption>
SHARES VALUE
INVESTMENT COMPANIES (0.1%)
- ----------------------------------------------------------------------------
iShares MSCI Japan Index Fund (j) 14,300 $ 205,634
Vanguard Europe Pacific ETF (e)(j)(k) 5,350 280,554
------------
Total Investment Companies
(Cost $479,702) 486,188
------------
COMMON STOCKS (62.2%)
- ----------------------------------------------------------------------------
AEROSPACE & DEFENSE (0.4%)
Cobham PLC 17,200 75,283
Northrop Grumman Corp. 30,800 2,575,496
Rolls-Royce Group PLC (k) 11,670 130,548
Rolls-Royce Group PLC Class B (c) 471,468 980
------------
2,782,307
------------
AGRICULTURE (0.0%)++
Geberit A.G. 620 83,548
------------
AIRLINES (0.0%)++
Delta Air Lines, Inc. (k) 3,226 67,101
Gol Linhas Aereas
Inteligentes S.A., ADR (e)(l) 2,900 79,402
Northwest Airlines, Inc. (k) 2,510 46,560
------------
193,063
------------
APPAREL (0.9%)
Burberry Group PLC 1,100 14,066
Coach, Inc. (k) 82,100 3,001,576
Polo Ralph Lauren Corp. 37,700 2,593,760
Puma A.G. Rudolf Dassler Sport 717 307,346
Yue Yuen Industrial Holdings, Ltd. 30,500 93,465
------------
6,010,213
------------
AUTO MANUFACTURERS (0.0%)++
Bayerische Motoren Werke A.G. 525 35,157
------------
BANKS (3.5%)
Banco Popular Espanol S.A. 16,700 291,499
Bank of America Corp. 135,204 6,527,649
Bank of Ireland 3,900 72,029
Bank of New York Mellon Corp. (The) 136,132 6,650,048
Capital One Financial Corp. 32,500 2,131,675
Fortis N.V. 4,100 131,016
Lloyds TSB Group PLC 15,500 175,810
V PNC Financial Services Group, Inc. 93,400 6,739,744
Svenska Handelsbanken Class A 2,200 72,906
U.S. Bancorp 33,600 1,114,176
------------
23,906,552
------------
BEVERAGES (0.0%)++
C&C Group PLC 15,800 127,023
Diageo PLC 6,300 144,095
------------
271,118
------------
</Table>
20 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ----------------------------------------------------------------------------
BIOTECHNOLOGY (1.5%)
Amgen, Inc. (k) 37,700 $ 2,190,747
Celgene Corp. (k) 62,800 4,144,800
Genentech, Inc. (k) 47,800 3,543,414
------------
9,878,961
------------
CHEMICALS (0.7%)
E.I. du Pont de Nemours & Co. 87,100 4,312,321
Nitto Denko Corp. 2,300 111,446
------------
4,423,767
------------
COMMERCIAL SERVICES (0.9%)
Manpower, Inc. 42,400 3,168,976
Randstad Holdings N.V. 6,465 358,300
Robert Half International, Inc. 75,300 2,265,777
------------
5,793,053
------------
COMPUTERS (4.1%)
Affiliated Computer Services, Inc. Class A (k) 47,200 2,391,152
V Apple, Inc. (k) 40,100 7,616,995
Cognizant Technology Solutions Corp. Class A (k) 73,600 3,051,456
Computer Sciences Corp. (k) 50,000 2,919,500
Hewlett-Packard Co. 99,000 5,116,320
International Business Machines Corp. 31,400 3,646,168
Network Appliance, Inc. (k) 85,900 2,704,991
OBIC Co., Ltd. 2,220 443,942
Otsuka Corp. 700 66,805
TietoEnator OYJ 3,000 73,572
------------
28,030,901
------------
DISTRIBUTION & WHOLESALE (0.1%)
WESCO International, Inc. (e)(k) 11,900 555,135
------------
DIVERSIFIED FINANCIAL SERVICES (5.5%)
AWD Holding A.G. 5,925 196,285
Citigroup, Inc. 131,600 5,514,040
Fannie Mae 69,800 3,981,392
First Marblehead Corp. (The) (e) 20,700 803,781
Freddie Mac 66,900 3,494,187
Goldman Sachs Group, Inc. (The) 25,600 6,346,752
IntercontinentalExchange, Inc. (e)(k) 25,100 4,472,820
JPMorgan Chase & Co. 83,544 3,926,568
Merrill Lynch & Co., Inc. 56,100 3,703,722
MLP A.G. (e) 20,600 273,037
Morgan Stanley 66,100 4,445,886
Provident Financial PLC 13,045 239,102
UBS A.G. Registered (Chi-X Exchange) 1,200 64,175
UBS A.G. Registered (NYS Exchange) 2,200 118,118
------------
37,579,865
------------
</Table>
<Table>
<Caption>
SHARES VALUE
ELECTRIC (1.5%)
CenterPoint Energy, Inc. (e) 168,600 $ 2,825,736
FirstEnergy Corp. 46,600 3,248,020
NRG Energy, Inc. (k) 95,300 4,351,398
------------
10,425,154
------------
ELECTRICAL COMPONENTS & EQUIPMENT (0.0%)++
Ultra Electronics Holdings 6,500 169,213
------------
ELECTRONICS (1.5%)
Amphenol Corp. Class A 94,300 4,174,661
Barco N.V. 2,500 205,477
Keyence Corp. 300 68,834
Thermo Fisher Scientific, Inc. (k) 89,700 5,275,257
Venture Corp., Ltd. 13,000 124,896
------------
9,849,125
------------
ENTERTAINMENT (0.0%)++
OPAP S.A. 5,000 204,246
------------
ENVIRONMENTAL CONTROL (0.0%)++
Munters A.B 5,750 68,118
------------
FOOD (0.9%)
General Mills, Inc. 45,400 2,620,942
Kroger Co. (The) 92,100 2,706,819
Nestle S.A. Registered 485 223,785
Tesco PLC 68,800 698,113
------------
6,249,659
------------
GAS (0.0%) ++
Snam Rete Gas S.p.A. (e) 10,900 70,499
Tokyo Gas Co., Ltd. 30,000 132,883
------------
203,382
------------
HEALTH CARE-PRODUCTS (0.6%)
Johnson & Johnson 65,000 4,236,050
William Demant Holding (k) 390 35,738
------------
4,271,788
------------
HEALTH CARE-SERVICES (1.2%)
Humana, Inc. (k) 54,400 4,077,280
Quest Diagnostics, Inc. 30,700 1,632,626
UnitedHealth Group, Inc. 52,800 2,595,120
------------
8,305,026
------------
HOUSEHOLD PRODUCTS & WARES (0.3%)
Avery Dennison Corp. 36,600 2,119,140
------------
INSURANCE (2.6%)
Assurant, Inc. 53,600 3,132,384
Friends Provident PLC 21,500 82,257
Genworth Financial, Inc. Class A 176,100 4,807,530
Hannover Rueckversicherung A.G. 6,075 320,758
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 21
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ----------------------------------------------------------------------------
INSURANCE (CONTINUED)
Hartford Financial Services
Group, Inc. (The) 38,500 $ 3,735,655
ING Groep N.V. (l) 3,750 168,611
Prudential Financial, Inc. 53,200 5,145,504
------------
17,392,699
------------
INTERNET (1.3%)
Akamai Technologies, Inc. (e)(k) 68,600 2,688,434
Alibaba.com, Ltd. (c) 100 174
Google, Inc. Class A (k) 9,000 6,363,000
------------
9,051,608
------------
IRON & STEEL (0.6%)
Allegheny Technologies, Inc. (e) 36,200 3,698,554
------------
LEISURE TIME (0.5%)
Carnival Corp. (e) 49,900 2,394,202
Harley-Davidson, Inc. 22,200 1,143,300
------------
3,537,502
------------
MACHINERY--DIVERSIFIED (0.1%)
Rheinmetall A.G. 4,330 385,867
------------
MEDIA (1.5%)
Antena 3 de Television S.A. 16,700 296,095
Comcast Corp. Class A (k) 178,500 3,757,425
DIRECTV Group, Inc. (The) (k) 155,600 4,120,288
Gannett Co., Inc. 1,600 67,856
M6-Metropole Television 1,200 35,530
MediaSet S.p.A. 86,210 892,888
Reed Elsevier N.V. 16,550 320,046
Societe Television Francaise 1 15,220 420,876
------------
9,911,004
------------
METAL FABRICATE & HARDWARE (0.9%)
Assa Abloy A.B. Class B 6,700 140,285
MISUMI Group, Inc. (e) 10,500 176,479
Precision Castparts Corp. 36,900 5,527,989
------------
5,844,753
------------
MINING (2.1%)
Alcoa, Inc. 43,900 1,738,001
V Southern Copper Corp. (e) 52,200 7,292,340
Teck Cominco, Ltd. Class B (e) 109,400 5,470,000
------------
14,500,341
------------
MISCELLANEOUS--MANUFACTURING (1.0%)
General Electric Co. 49,400 2,033,304
Honeywell International, Inc. 45,000 2,718,450
Pentair, Inc. (e) 48,100 1,702,259
------------
6,454,013
------------
</Table>
<Table>
<Caption>
SHARES VALUE
OFFICE & BUSINESS EQUIPMENT (0.1%)
Canon, Inc. 5,200 $ 259,177
Neopost S.A. 1,400 162,582
RICOH Co., Ltd. 10,000 195,467
------------
617,226
------------
OIL & GAS (5.1%)
Chevron Corp. 50,000 4,575,500
ConocoPhillips 52,200 4,434,912
Diamond Offshore Drilling, Inc. 19,600 2,219,308
ENSCO International, Inc. 51,900 2,879,931
ExxonMobil Corp. 28,800 2,649,312
GlobalSantaFe Corp. 40,300 3,265,509
Hess Corp. 36,900 2,642,409
Royal Dutch Shell PLC Class A, ADR (e)(l) 850 74,384
Suncor Energy, Inc. 39,300 4,292,739
Total S.A. 2,250 181,377
Valero Energy Corp. 41,300 2,908,759
XTO Energy, Inc. 68,600 4,553,668
------------
34,677,808
------------
OIL & GAS SERVICES (3.2%)
Baker Hughes, Inc. 46,800 4,058,496
Cameron International Corp. (k) 46,700 4,546,712
Halliburton Co. 109,300 4,308,606
National Oilwell Varco, Inc. (k) 73,200 5,361,168
Smith International, Inc. 55,900 3,692,195
------------
21,967,177
------------
PHARMACEUTICALS (2.5%)
Barr Pharmaceuticals, Inc. (e)(k) 66,600 3,817,512
Novartis A.G. Registered 5,100 271,202
Novartis A.G., ADR (l) 1,900 101,023
Roche Holding A.G. Genusscheine 3,150 537,327
Schering-Plough Corp. 158,200 4,828,264
Teva Pharmaceutical Industries, Ltd., Sponsored
ADR (l) 81,200 3,573,612
Wyeth 71,200 3,462,456
------------
16,591,396
------------
PIPELINES (0.7%)
Williams Cos., Inc. 131,100 4,783,839
------------
RETAIL (6.3%)
Abercrombie & Fitch Co. Class A 39,200 3,104,640
American Eagle Outfitters, Inc. 99,500 2,366,110
AutoZone, Inc. (e)(k) 26,200 3,259,542
Bed Bath & Beyond, Inc. (k) 40,600 1,377,964
CarMax, Inc. (e)(k) 70,000 1,460,900
CVS Caremark Corp. 132,800 5,547,056
Home Depot, Inc. (The) (e) 81,700 2,574,367
J.C. Penney Co., Inc. 48,500 2,727,640
Kohl's Corp. (k) 54,800 3,012,356
Limited Brands, Inc. 108,500 2,388,085
Lowe's Cos., Inc. 111,000 2,984,790
</Table>
22 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ----------------------------------------------------------------------------
RETAIL (CONTINUED)
Nordstrom, Inc. 68,500 $ 2,701,640
Ryohin Keikaku Co., Ltd. 6,000 376,544
TJX Cos., Inc. 215,200 6,225,736
Wal-Mart Stores, Inc. 61,900 2,798,499
------------
42,905,869
------------
SEMICONDUCTORS (3.4%)
Applied Materials, Inc. (e) 200,500 3,893,710
V Intel Corp. 249,600 6,714,240
MEMC Electronic Materials, Inc. (k) 65,600 4,803,232
NVIDIA Corp. (k) 143,800 5,087,644
Texas Instruments, Inc. 76,500 2,493,900
------------
22,992,726
------------
SOFTWARE (2.4%)
BMC Software, Inc. (k) 88,800 3,004,992
V Microsoft Corp. 224,700 8,271,207
Oracle Corp. (k) 221,800 4,917,306
Temenos Group A.G. (k) 638 17,762
------------
16,211,267
------------
TELECOMMUNICATIONS (3.3%)
AT&T, Inc. 110,300 4,609,437
Cisco Systems, Inc. (k) 174,800 5,778,888
Nokia OYJ, Sponsored ADR (l) 72,400 2,875,728
NTT DoCoMo, Inc., Sponsored ADR (l) 30,000 438,000
Sprint Nextel Corp. 140,100 2,395,710
Telecom Italia S.p.A. 138,900 358,947
Telefonaktiebolaget LM Ericsson Class B 42,600 127,423
Telefonaktiebolaget LM Ericsson, Sponsored ADR (l) 6,200 186,310
Verizon Communications, Inc. 113,300 5,219,731
------------
21,990,174
------------
TRANSPORTATION (1.0%)
FedEx Corp. 20,300 2,097,802
Norfolk Southern Corp. 73,600 3,801,440
TNT N.V. 13,400 548,155
------------
6,447,397
------------
Total Common Stocks
(Cost $349,092,538) 421,369,711
------------
CONVERTIBLE PREFERRED STOCK (0.0%)++
- ----------------------------------------------------------------------------
SOFTWARE (0.0%)++
QuadraMed Corp.
5.50% (b)(m)(n) 10,700 251,450
------------
Total Convertible Preferred Stock
(Cost $267,500) 251,450
------------
</Table>
<Table>
<Caption>
SHARES VALUE
PREFERRED STOCK (0.0%)++
- ----------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (0.0%)++
Sovereign Real Estate Investment Corp.
12.00% (b)(m) 100 $ 139,650
------------
Total Preferred Stock
(Cost $147,000) 139,650
------------
<Caption>
NUMBER OF
WARRANTS
WARRANTS (0.0%)++
- ----------------------------------------------------------------------------
AIRLINES (0.0%)++
Ryanair Holdings PLC
Strike Price E0.000001
Expire 3/21/08 (b)(k) 40,165 341,232
------------
Total Warrants
(Cost $288,877) 341,232
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (13.6%)
- ----------------------------------------------------------------------------
COMMERCIAL PAPER (2.5%)
American Express Credit Corp.
4.75%, due 11/1/07 $2,000,000 2,000,000
BNP Paribas Finance, Inc.
4.67%, due 11/5/07 5,000,000 4,997,406
Deutsche Bank Financial LLC
4.77%, due 11/1/07 5,050,000 5,050,000
Societe Generale North America, Inc.
4.685%, due 11/6/07 2,000,000 1,998,699
Toyota Motor Credit Corp.
4.73%, due 11/5/07 3,000,000 2,998,423
------------
Total Commercial Paper
(Cost $17,044,528) 17,044,528
------------
<Caption>
SHARES
INVESTMENT COMPANY (10.9%)
State Street Navigator Securities Lending Prime
Portfolio (p) 74,009,091 74,009,091
------------
Total Investment Company
(Cost $74,009,091) 74,009,091
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 23
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- ----------------------------------------------------------------------------
U.S. GOVERNMENT (0.2%)
U.S. Treasury Bill
3.36%, due 11/15/07 $1,000,000 $ 998,693
------------
Total U.S. Government
(Cost $998,693) 998,693
------------
Total Short-Term Investments
(Cost $92,052,312) 92,052,312
------------
Total Investments
(Cost $678,581,606) 110.7% 750,221,754(q)
Liabilities in Excess of
Cash and Other Assets (10.7) (72,319,957)
--------- ------------
Net Assets 100.0% $677,901,797
========= ============
</Table>
<Table>
++ Less than one-tenth of a percent.
+++ All of the Fund's liquid assets are maintained to cover
"senior securities transactions" which may include, but are
not limited to, forwards, TBA's, options and futures. These
securities are marked-to-market daily and reviewed against
the value of the Fund's "senior securities" holdings to
ensure proper coverage for these transactions.
(a) Floating rate. Rate shown is the rate in effect at October
31, 2007.
(b) May be sold to institutional investors only under Rule 144a
or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(c) Fair valued security. The total market value of these
securities at October 31, 2007 is $1,778,759, which reflects
0.3% of the Fund's net assets.
(d) Subprime mortgage investment. The total market value of
these securities at October 31, 2007 is $1,325,912, which
represents 0.2% of the Fund's net assets.
(e) Represents a security, or a portion thereof, which is out on
loan. The aggregate market value of such securities is
$72,022,652; cash collateral of $74,009,091 (included in
liabilities) was received with which the Fund purchased
highly liquid short-term investments.
(f) PIK ("Payment in Kind")--interest or dividend payment is
made with additional securities.
(g) Floating Rate Loan--generally pays interest at rates which
are periodically re-determined at a margin above the London
Inter-Bank Offered Rate ("LIBOR") or other short-term rates.
The rate shown is the rate(s) in effect at October 31, 2007.
Floating Rate Loans are generally considered restrictive in
that the Fund is ordinarily contractually obligated to
receive consent from the Agent Bank and/or borrower prior to
disposition of a Floating Rate Loan.
(h) ACES--Alternative Credit Enhancement Structure.
(i) Yankee Bond--dollar-denominated bond issued in the United
States by a foreign bank or corporation.
(j) Exchange Traded Fund--represents a basket of securities that
are traded on an exchange.
(k) Non-income producing security.
(l) ADR--American Depositary Receipt.
(m) Illiquid security. The total market value of these
securities at October 31, 2007 is $391,100, which represents
0.1% of the Fund's net assets.
(n) Restricted security.
(o) Issue in default.
(p) Represents a security, or a portion thereof, purchased with
cash collateral received for securities on loan.
(q) At October 31, 2007, cost is $678,952,840 for federal income
tax purposes and net unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 86,735,854
Gross unrealized depreciation (15,466,940)
-------------------
Net unrealized appreciation $ 71,268,914
===================
</Table>
The following abbreviations are used in the above portfolio:
E--Euro
24 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2007
<Table>
ASSETS:
Investment in securities, at value (identified
cost $678,581,606) including $72,022,652
market value of securities loaned $750,221,754
Cash denominated in foreign currencies
(identified cost $412,243) 414,822
Cash 46,044
Receivables:
Dividends and interest 2,759,413
Investment securities sold 671,428
Fund shares sold 60,234
Other assets 17,883
-------------
Total assets 754,191,578
-------------
LIABILITIES:
Securities lending collateral 74,009,091
Payables:
Investment securities purchased 786,963
Manager (See Note 3) 366,554
Transfer agent (See Note 3) 362,058
Fund shares redeemed 348,228
NYLIFE Distributors (See Note 3) 261,348
Shareholder communication 93,889
Professional fees 32,133
Custodian 13,791
Trustees 8,942
Accrued expenses 6,784
-------------
Total liabilities 76,289,781
-------------
Net assets $677,901,797
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized $ 337,054
Additional paid-in capital 530,155,343
-------------
530,492,397
Accumulated undistributed net investment
income 822,545
Accumulated undistributed net realized gain on
investments, foreign currency transactions
and written option transactions 74,944,931
Net unrealized appreciation on investments 71,640,148
Net unrealized appreciation on translation of
other assets and liabilities in foreign
currencies and foreign currency forward
contracts 1,776
-------------
Net assets $677,901,797
=============
CLASS A
Net assets applicable to outstanding shares $518,546,876
=============
Shares of beneficial interest outstanding 25,795,279
=============
Net asset value per share outstanding $ 20.10
Maximum sales charge (5.50% of offering price) 1.17
-------------
Maximum offering price per share outstanding $ 21.27
=============
CLASS B
Net assets applicable to outstanding shares $156,346,147
=============
Shares of beneficial interest outstanding 7,760,658
=============
Net asset value and offering price per share
outstanding $ 20.15
=============
CLASS C
Net assets applicable to outstanding shares $ 2,980,139
=============
Shares of beneficial interest outstanding 148,094
=============
Net asset value and offering price per share
outstanding $ 20.12
=============
CLASS I
Net assets applicable to outstanding shares $ 28,635
=============
Shares of beneficial interest outstanding 1,414
=============
Net asset value and offering price per share
outstanding $ 20.25
=============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 25
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2007
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 13,977,895
Dividends (a) 6,554,828
Income from securities loaned--net 242,876
------------
Total income 20,775,599
------------
EXPENSES:
Manager (See Note 3) 4,346,669
Transfer agent--Classes A, B and C
(See Note 3) 2,172,192
Transfer agent--Class I (See Note 3) 20
Distribution--Class B (See Note 3) 1,348,890
Distribution--Class C (See Note 3) 23,607
Distribution/Service--Class A (See Note 3) 1,270,256
Service--Class B (See Note 3) 449,630
Service--Class C (See Note 3) 7,869
Professional fees 141,576
Shareholder communication 136,086
Recordkeeping 95,778
Registration 59,055
Custodian 54,751
Trustees 39,723
Miscellaneous 26,602
------------
Total expenses before waiver 10,172,704
Expense waiver from Manager (See Note 3) (575,951)
------------
Net expenses 9,596,753
------------
Net investment income 11,178,846
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FOREIGN
CURRENCY TRANSACTIONS AND WRITTEN OPTIONS:
Net realized gain (loss) on:
Security transactions 79,734,679
Written option transactions 105,714
Foreign currency transactions (11,221)
------------
Net realized gain on investments, foreign
currency transactions and written option
transactions 79,829,172
------------
Net change in unrealized appreciation on:
Security transactions and unfunded loan
commitments (12,859,280)
Translation of other assets and liabilities
in foreign currencies 1,773
------------
Net change in unrealized appreciation on
investments, unfunded loan commitments and
foreign currency transactions (12,857,507)
------------
Net realized and unrealized gain on
investments, foreign currency transactions,
written option transactions and unfunded
loan commitments 66,971,665
------------
Net increase in net assets resulting from
operations $ 78,150,511
============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$35,002.
26 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2007 AND OCTOBER 31, 2006
<Table>
<Caption>
2007 2006
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 11,178,846 $ 7,921,900
Net realized gain on investments,
foreign currency transactions and
written option transactions 79,829,172 56,148,233
Net increase from payments from
Manager for losses attributable
to shareholder trading
arrangements (See Note 3(B) on
page 34.) -- 102,000
Net change in unrealized
appreciation on investments,
unfunded loan commitments and
foreign currency transactions (12,857,507) 8,699,472
-----------------------------
Net increase in net assets
resulting from operations 78,150,511 72,871,605
-----------------------------
Dividends and distributions to shareholders:
From net investment income:
Class A (9,255,960) (5,694,551)
Class B (1,983,268) (2,030,485)
Class C (33,924) (22,067)
Class I (180) (197)
-----------------------------
11,273,332 7,747,300
-----------------------------
From net realized gain on
investments:
Class A (39,886,253) (3,889,262)
Class B (16,070,543) (26,533,582)
Class C (254,730) (146,215)
Class I (531) (267)
-----------------------------
56,212,057 30,569,326
-----------------------------
Total dividends and distributions
to shareholders (67,485,389) (38,316,626)
-----------------------------
Capital share transactions:
Net proceeds from sale of shares 27,146,131 68,856,908
Net asset value of shares issued
to shareholders in reinvestment
of dividends and distributions 65,977,833 37,486,866
Cost of shares redeemed (133,563,713) (201,171,682)
Net asset value of shares
converted
(See Note 1):
Class A 38,755,220 417,375,006
Class B (38,755,220) (417,375,006)
-----------------------------
Decrease in net assets derived
from capital share transactions (40,439,749) (94,827,908)
-----------------------------
Net decrease in net assets (29,774,627) (60,272,929)
</Table>
<Table>
<Caption>
2007 2006
NET ASSETS:
Beginning of year $ 707,676,424 $ 767,949,353
-----------------------------
End of year $ 677,901,797 $ 707,676,424
=============================
Accumulated undistributed net
investment income at end of year $ 822,545 $ 902,151
=============================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 27
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning
of period $ 19.82 $ 18.92 $ 17.96 $ 17.42 $ 15.29 $ 18.92
-------- -------- ------- -------- ----------- ------------
Net investment income 0.35 (a) 0.27 (a) 0.21 (b) 0.17 0.16 (a) 0.27
Net realized and unrealized
gain (loss) on investments 1.88 1.67 (e) 1.29 0.54 2.12 (3.62)
-------- -------- ------- -------- ----------- ------------
Total from investment
operations 2.23 1.94 1.50 0.71 2.28 (3.35)
-------- -------- ------- -------- ----------- ------------
Less dividends and
distributions:
From net investment income (0.35) (0.27) (0.21) (0.17) (0.15) (0.28)
From net realized gain on
investments (1.60) (0.77) (0.33) -- -- --
-------- -------- ------- -------- ----------- ------------
Total dividends and
distributions (1.95) (1.04) (0.54) (0.17) (0.15) (0.28)
-------- -------- ------- -------- ----------- ------------
Net asset value at end of
period $ 20.10 $ 19.82 $ 18.92 $ 17.96 $ 17.42 $ 15.29
======== ======== ======= ======== =========== ============
Total investment return (c) 12.18% 10.53%(d)(e) 8.43% 4.05% 15.02%(f) (17.75%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.81% 1.42% 1.10%(b) 0.94% 1.21%+ 1.57%
Net expenses 1.19% 1.19% 1.19% 1.30% 1.33%+ 1.30%
Expenses (before
waiver/reimbursement) 1.27% 1.34%(d) 1.31% 1.30% 1.33%+ 1.31%
Portfolio turnover rate 68% 70%(g) 77%(g) 103% 67% 96%
Net assets at end of period
(in 000's) $518,547 $502,340 $98,180 $115,877 $138,787 $140,298
</Table>
<Table>
<Caption>
CLASS C
-----------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
Net asset value at beginning
of period $19.84 $18.94 $17.98 $17.45 $15.32 $ 18.95
------ ------ ------ ------ ----------- ------------
Net investment income 0.21 (a) 0.12 (a) 0.07 (b) 0.04 0.06 (a) 0.14
Net realized and unrealized
gain (loss) on investments 1.88 1.67 (e) 1.28 0.53 2.13 (3.61)
------ ------ ------ ------ ----------- ------------
Total from investment
operations 2.09 1.79 1.35 0.57 2.19 (3.47)
------ ------ ------ ------ ----------- ------------
Less dividends and
distributions:
From net investment income (0.21) (0.12) (0.06) (0.04) (0.06) (0.16)
From net realized gain on
investments (1.60) (0.77) (0.33) -- -- --
------ ------ ------ ------ ----------- ------------
Total dividends and
distributions (1.81) (0.89) (0.39) (0.04) (0.06) (0.16)
------ ------ ------ ------ ----------- ------------
Net asset value at end of
period $20.12 $19.84 $18.94 $17.98 $17.45 $ 15.32
====== ====== ====== ====== =========== ============
Total investment return (c) 11.33% 9.69%(d)(e) 7.60% 3.27% 14.33%(f) (18.37%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.06% 0.62% 0.35%(b) 0.19% 0.46%+ 0.82%
Net expenses 1.94% 1.94% 1.94% 2.05% 2.08%+ 2.05%
Expenses (before
waiver/reimbursement) 2.02% 2.09%(d) 2.06% 2.05% 2.08%+ 2.06%
Portfolio turnover rate 68% 70%(g) 77%(g) 103% 67% 96%
Net assets at end of period
(in 000's) $2,980 $3,175 $3,854 $4,532 $4,845 $ 4,501
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Net investment income includes $0.01 and there was no effect to the net income ratio, as a
result of a special one time dividend from Microsoft Corp.
(c) Total return is calculated exclusive of sales charge. Class I is not subject to sales
charges.
(d) Includes nonrecurring reimbursements for Manager for professional fees. The effect on
total return was less than one-hundredth of a percent.
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses were less than $0.01 per share
on net realized gains on investments and the effect on total return was 0.02%,
respectively.
(f) Total return is not annualized.
(g) The portfolio turnover rate not including mortgage dollar rolls is 55% and 38% for the
years ended October 31, 2006 and 2005, respectively.
</Table>
28 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
- -----------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
$ 19.86 $ 18.95 $ 17.98 $ 17.45 $ 15.32 $ 18.95
-------- -------- -------- -------- ----------- ------------
0.21 (a) 0.11 (a) 0.07 (b) 0.04 0.06 (a) 0.14
1.89 1.69 (e) 1.29 0.53 2.13 (3.61)
-------- -------- -------- -------- ----------- ------------
2.10 1.80 1.36 0.57 2.19 (3.47)
-------- -------- -------- -------- ----------- ------------
(0.21) (0.12) (0.06) (0.04) (0.06) (0.16)
(1.60) (0.77) (0.33) -- -- --
-------- -------- -------- -------- ----------- ------------
(1.81) (0.89) (0.39) (0.04) (0.06) (0.16)
-------- -------- -------- -------- ----------- ------------
$ 20.15 $ 19.86 $ 18.95 $ 17.98 $ 17.45 $ 15.32
======== ======== ======== ======== =========== ============
11.37% 9.74%(d)(e) 7.66% 3.27% 14.33%(f) (18.37%)
1.06% 0.55% 0.35%(b) 0.19% 0.46%+ 0.82%
1.94% 1.94% 1.94% 2.05% 2.08%+ 2.05%
2.02% 2.09%(d) 2.06% 2.05% 2.08%+ 2.06%
68% 70%(g) 77%(g) 103% 67% 96%
$156,346 $202,149 $665,908 $749,689 $829,016 $793,340
</Table>
<Table>
<Caption>
CLASS I
- ---------------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2007 2006 2005 2004
$19.90 $18.98 $17.92 $17.98
------ ------ ------ -----------
0.44 (a) 0.36 (a) 0.26 (b) 0.15
1.93 1.69 (e) 1.42 (0.03)
------ ------ ------ -----------
2.37 2.05 1.68 0.12
------ ------ ------ -----------
(0.42) (0.36) (0.29) (0.18)
(1.60) (0.77) (0.33) --
------ ------ ------ -----------
(2.02) (1.13) (0.62) (0.18)
------ ------ ------ -----------
$20.25 $19.90 $18.98 $17.92
====== ====== ====== ===========
12.65% 11.11%(d)(e) 9.51% 0.68%(f)
2.23% 1.86% 1.43%(b) 1.40%+
0.81% 0.74% 0.86% 0.84%+
0.93% 0.89%(d) 0.98% 0.84%+
68% 70%(g) 77%(g) 103%
$ 29 $ 13 $ 7 $ 3
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 29
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises nineteen funds (collectively referred to as the
"Funds"). These financial statements and notes relate only to MainStay Total
Return Fund (the "Fund"), a diversified fund.
The Fund currently offers four classes of shares. Class A shares commenced on
January 3, 1995. Class B shares commenced on December 29, 1987. Class C shares
commenced on September 1, 1998. Class I shares commenced on January 2, 2004.
Class A shares are offered at net asset value per share plus an initial sales
charge. No sales charge applies on investments of $1 million or more (and
certain other qualified purchases) in Class A shares, but a contingent deferred
sales charge is imposed on certain redemptions of such shares within one year of
the date of purchase. Class B shares and Class C shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within up to six years of purchase of Class B
shares and a 1% contingent deferred sales charge may be imposed on redemptions
made within one year of purchase of Class C shares. Class I shares are not
subject to a sales charge. As approved by the Board of Trustees in 1997, Class B
shares convert to Class A shares eight years after the date they were purchased.
The four classes of shares bear the same voting (except for issues that relate
solely to one class), dividend, liquidation and other rights and conditions
except that Class B and Class C shares are subject to higher distribution fee
rates than Class A shares under a distribution plan pursuant to Rule 12b-1 under
the 1940 Act. Class I shares are not subject to a distribution or service fee.
The Fund's investment objective is to realize current income consistent with
reasonable opportunity for future growth of capital and income.
The Fund invests in foreign securities, which carry certain risks that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country, industry or region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent or brokers selected by the Fund's Manager, as defined in Note 3,
whose prices reflect broker/dealer supplied valuations and electronic data
processing techniques, if such prices are deemed by the Fund's Manager to be
representative of market values, at the regular close of trading of the New York
Stock Exchange (generally 4:00 p.m. Eastern time) on each day the Fund is open
for business.
Equity securities are valued at the latest quoted sales prices as of the close
of trading on the New York Stock Exchange on each day the Fund is open for
business ("valuation date"). Securities that are not traded on the valuation
date are valued at the mean of the latest quoted bid and asked prices. Prices
normally are taken from the principal market in which each security trades.
Options contracts are valued at the last posted settlement price on the market
where such options are principally traded. Investments in mutual funds are
valued at their net asset value as of the close of the New York Stock Exchange
on the date of valuation.
Loans are valued at the average of bid quotations obtained from a pricing
service. The Trust has engaged an independent pricing service to provide market
value quotations from dealers in loans. As of October 31, 2007, 100% of total
investments in loans were valued based on prices from such services.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: a security the trading for which has been
halted or suspended; a debt security that has recently gone into default and for
which there is not a current market quotation; a security of an issuer that has
entered into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; a security where the trading on that security's principal market
is
30 MainStay Total Return Fund
temporarily closed at a time when, under normal conditions, it would be open. At
October 31, 2007, the Fund held securities with a value of $1,778,759 that were
valued in such a manner.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. These events may include, but are not limited to, situations
relating to a single issue in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. Should the
Manager or Subadvisor, as defined in Note 3, conclude that such events may have
effected the accuracy of the last price reported on the local foreign market,
the Manager or Subadvisor may, pursuant to procedures adopted by the Fund,
adjust the value of the local price to reflect the impact on the price of such
securities as a result of such events. Additionally, international equity
securities are also fair valued whenever the movement of a particular index
exceeds certain thresholds. In such cases, the securities are fair valued by
applying factors provided by a third party vendor in accordance with the Fund's
policies and procedures.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
of net investment income quarterly and distributions of net realized capital and
currency gains, if any, annually. All dividends and distributions are reinvested
in shares of the Fund, at net asset value, unless the shareholder elects
otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America. Permanent
book/tax differences relating to income and gains are reclassified amongst
undistributed net investment income, accumulated net realized gain or loss and
paid-in-capital.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method and include gains
and losses from repayments of principal on mortgage-backed securities. Dividend
income is recognized on the ex-dividend date and interest income is accrued as
earned using the effective interest rate method. Discounts and premiums on
securities purchased, other than short-term securities, for the Fund are
accreted and amortized, respectively, on the effective interest rate method over
the life of the respective securities or, in the case of a callable security,
over the period to the first date of call. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (C) on
page 34) are allocated to separate classes of shares pro rata based upon their
relative net assets value on the date the expenses are incurred. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. Premiums are received
and are recorded as liabilities. The liabilities are subsequently adjusted and
unrealized appreciation or depreciation is recorded to reflect the current value
of the options written. Premiums received from writing options which expire are
treated as realized gains. Premiums received from writing options which are
exercised or are canceled in closing purchase transactions are added to the
proceeds or netted against the amount paid on the transaction to determine the
realized gain or loss. By writing a covered call option, in exchange for the
premium, the Fund foregoes the opportunity for capital appreciation above the
exercise price should the price of the underlying security or foreign currency
increase. By writing a covered put option, the Fund, in exchange for the
premium, accepts the risk of a decline in the market value of the underlying
security or foreign currency below the exercise price. A call option may be
covered by the call writer's owning the underlying security throughout the
option period. A call option may also be covered by the call writer's
maintaining liquid
www.mainstayfunds.com 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
assets valued at greater than the exercise price of the call written. When
writing a covered call option, the Fund, in return for the premium on the
option, gives up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as the obligation
as the writer continues, has retained the risk of loss should the price of the
underlying security decline. After writing a put option, the Fund may incur a
loss equal to the difference between the exercise price of the option and the
sum of the market value of the underlying security plus the premium received
from the sale of the option.
The Fund may purchase call and put options on its portfolio securities. The Fund
may purchase call options to protect against an increase in the price of the
security it anticipates purchasing. The Fund may purchase put options on its
securities to protect against a decline in the value of the security or to close
out covered written put positions. The Fund may also purchase options to seek to
enhance returns. Risks may arise from an imperfect correlation between the
change in market value of the securities held by the Fund and the prices of
options relating to the securities purchased or sold by the Fund and from the
possible lack of a liquid secondary market for an option. The maximum exposure
to loss for any purchased option is limited to the premium initially paid for
the option. (See Note 5 on page 35.)
(H) LOAN ASSIGNMENTS, PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan
assignments and loan participations. Loan assignments and participations are
agreements to make money available (a "commitment") to a borrower in a specified
amount, at a specified rate and within a specified time. Such loan assignments
and participations are typically senior, secured and collateralized in nature.
The Fund records an investment when the borrower withdraws money and records
interest as earned. These loans pay interest at rates which are periodically
reset by reference to a base lending rate plus a spread. These base lending
rates are generally the prime rate offered by a designated U.S. bank or London
InterBank Offered Rate ("LIBOR").
The loans in which the Fund invests are generally readily marketable, but may be
subject to some restrictions on resale. For example, the Fund may be
contractually obligated to receive approval from the agent bank and/or borrower
prior to the sale of these investments.
The Fund assumes the credit risk of the borrower, the selling participant and
any other persons interpositioned between the Fund and the borrower
("intermediate participants"). In the event that the borrower, selling
participant or intermediate participants becomes insolvent or enters into
bankruptcy, the Fund may incur certain costs and delays in realizing payment, or
may suffer a loss of principal and/or interest.
Unfunded commitments represent the remaining obligation of the Fund to the
borrower. At any point in time, up to the maturity date of the issue, the
borrower may demand the unfunded portion. These unfunded amounts are recorded in
memorandum accounts.
(I) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Prices of securities denominated in foreign currency amounts
are translated into U.S. dollars at the mean between the buying and selling
rates last quoted by any major U.S. bank at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date,
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities are presented at the exchange rates and market values
at the close of the period. The realized and unrealized changes in net assets
arising from fluctuations in exchange rates and market prices of securities are
not separately presented.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains or losses
realized as a result of differences between the amounts of securities sale
proceeds or purchase cost, dividends, interest and withholding taxes as recorded
on the Fund's books, and the U.S. dollar equivalent amount actually received or
paid. Net currency gains or losses from valuing such foreign currency
denominated assets and liabilities, other than investments at valuation date
exchange rates, are reflected in unrealized foreign exchange gains or losses.
(J) MORTGAGE DOLLAR ROLLS. The Fund enters into mortgage dollar roll ("MDR")
transactions in which it sells mortgage-backed securities ("MBS") from its
portfolio to a counterparty from whom it simultaneously agrees to buy a similar
security on a delayed delivery basis. The MDR transactions of the Fund are
classified as purchase and sale transactions. The securities sold in connection
with the MDRs are removed from the portfolio and a realized gain or loss is
recognized. The securities the Fund has agreed to acquire are included at market
value in the Portfolio of Investments and liabilities for such purchase
commitments are included as payables for investments purchased. During the roll
period, the Fund forgoes principal and interest paid on the securities. The Fund
is compensated by the difference between the current sales price and the forward
price for the future as well as by the earnings on the cash proceeds of the
initial sale. MDRs may be renewed without physical delivery of the securities
subject to the contract. The Fund maintains liquid assets from its portfolio
having a value not less than the repurchase price, including accrued interest.
MDR transactions involve certain risks, including the risk that the MBS returned
to the
32 MainStay Total Return Fund
Fund at the end of the roll, while substantially similar, could be inferior to
what was initially sold to the counterparty.
(K) SECURITIES LENDING. In order to realize additional income the Fund may lend
its securities to broker-dealers and financial institutions. The loans are
collateralized by cash or securities at least equal at all times to the market
value of the securities loaned. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. The Fund may bear
the risk of delay in recovery of, or loss of rights in, the securities loaned
should the borrower of the securities experience financial difficulty. The Fund
receives compensation for lending its securities in the form of fees or it
retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(L) RESTRICTED SECURITIES. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933. The Fund may not
have the right to demand that such securities be registered. Disposal of these
securities may involve time-consuming negotiations and expenses and it may be
difficult to obtain a prompt sale at an acceptable price. (See Note 5 on page
35.)
(M) INDEMNIFICATIONS. In the normal course of business, the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote.
However, there can be no assurance that material liabilities related to such
obligations will not arise in the future which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager") a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. NYLIM provides offices and conducts clerical, recordkeeping and
bookkeeping services, and is responsible for the financial and accounting
records required to be maintained by the Fund. NYLIM also pays the salaries and
expenses of all personnel affiliated with the Fund and all the operational
expenses that are not the responsibility of the Fund. MacKay Shields LLC (the
"Subadvisor"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life, serves as subadvisor to the Fund and is responsible
for the day-to-day portfolio management of the Fund. Pursuant to the terms of a
Subadvisory Agreement between NYLIM and the Subadvisor, NYLIM pays for the
services of the Subadvisor.
The Fund is contractually obligated to pay NYLIM a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.64% on assets up to $500 million and 0.60% on assets in
excess of $500 million.
Effective March 1, 2007, NYLIM has entered into a written expense limitation
agreement under which it has agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses (total annual operating expenses
excluding taxes, interest, litigation, extraordinary expenses, and brokerage and
other transaction expenses relating to the purchase or sale of portfolio
investments) do not exceed the following amounts of average daily net assets for
each class: Class A, 1.19%; Class B, 1.94%; Class C, 1.94% and Class I, 0.79%.
This expense limitation may be modified or terminated only with the approval of
the Board of Trustees. NYLIM may recoup the amount of any management fee waivers
or expense reimbursements from the Fund pursuant to the agreement if such action
does not cause the Fund to exceed existing expense limitations and the
recoupment is made within three years after the year in which NYLIM incurred the
expense.
For the year ended October 31, 2007, NYLIM earned fees from the Fund in the
amount of $4,346,669 and waived its fees in the amount of $575,951.
As of October 31, 2007, the amounts of waived fees that are subject to possible
recoupment by NYLIM, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 2010 TOTAL
$177,401 $1,037,949 $575,951 $1,791,301
- -----------------------------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Prior to March 1, 2007, NYLIM had an agreement in place under which it had
agreed to waive a portion of the Fund's management fee or reimburse the expenses
of the Fund so that the Fund's total ordinary operating expenses did not exceed
1.19% of the Fund's average daily net assets for its Class A shares. NYLIM also
applied an equivalent waiver or reimbursement, in an equal amount of basis
points, to the other share classes of the Fund.
www.mainstayfunds.com 33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
State Street Bank & Trust Company ("SSBT"), One Lincoln Street, Boston,
Massachusetts, 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with NYLIM. These services include calculating
daily net asset values of the Fund, maintaining general ledger and sub-ledger
accounts for the calculation of the Fund's respective net asset values, and
assisting NYLIM in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, SSBT is compensated by
NYLIM.
(B) PAYMENTS FROM AFFILIATES. NYLIM reimbursed or paid all expenses relating to
the Board of Trustees' review of certain shareholder trading matters as
described below in the footnote relating to "Other Matters." (See Note 11 on
page 37.)
The total costs associated with the Board of Trustees' review were approximately
$849,975 and included payments to certain third party service providers.
The amount that was reimbursed to the Fund was $79,841. Additional payments were
made by affiliates relating to the shareholder trading matters. Further
discussion regarding these payments by affiliates can be found below in the
footnote relating to "Other Matters."
(C) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, other than Class I shares, has adopted distribution plans
(the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940
Act.
Pursuant to the Class A Plan, the Distributor receives a monthly distribution
fee from the Fund at an annual rate of 0.25% of the average daily net assets of
the Fund's Class A shares, which is an expense of the Class A shares of the Fund
for distribution or service activities as designated by the Distributor.
Pursuant to the Class B and Class C Plans, the Fund pays the Distributor a
monthly distribution fee, which is an expense of the Class B and Class C shares
of the Fund, at the annual rate of 0.75% of the average daily net assets of the
Fund's Class B and Class C shares. The Plans provide that the Class B and Class
C shares of the Fund also incur a service fee at the annual rate of 0.25% of the
average daily net asset value of the Class B and Class C shares of the Fund.
Class I shares are not subject to a distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(D) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $38,594 for the year ended
October 31, 2007. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $3,773, $177,889 and $100, respectively, for the year ended October
31, 2007.
(E) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund, for the year ended October 31, 2007,
amounted to $2,172,212.
(F) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts, effective March 1, 2007. Shareholders with an account
balance of less than $1,000 are charged an annual per account fee of $20
(assessed semi-annually).
(G) CAPITAL. At October 31, 2007, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $174,683 0.0*%
- -------------------------------------------------------------------
Class C 115 0.0*
- -------------------------------------------------------------------
Class I 1,372 4.8
- -------------------------------------------------------------------
</Table>
* Less than one-tenth of a percent.
(H) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2007, these fees, which are included in professional fees
shown on the Statement of Operations, were $25,865.
The Fund pays the Manager a monthly fee for certain pricing and recordkeeping
services provided under the Accounting Agreement at the annual rate of 1/20 of
1% for the first $20 million of average monthly net assets, 1/30 of 1% of the
next $80 million of average monthly net assets and 1/100 of 1% of any amount in
excess of $100 million of average monthly net assets. Fees for these services
provided to the Fund by the Manager amounted to $95,778 for the year ended
October 31, 2007.
34 MainStay Total Return Fund
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2007, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL GAIN TEMPORARY APPRECIATION ACCUMULATED
INCOME (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$15,952,038.. $60,186,672 $ -- $71,270,690 $147,409,400
------------------------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income, accumulated net undistributed
realized gain on investments and additional paid-in capital, arising from
permanent differences; net assets at October 31, 2007 are not affected.
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED NET ACCUMULATED UNDISTRIBUTED ADDITIONAL
INVESTMENT NET REALIZED GAIN (LOSS) PAID-IN
INCOME (LOSS) ON INVESTMENTS CAPITAL
14,88$0...... $(14,690) $(190)
----------------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to paydown gain (loss) and
foreign currency gain (loss).
The tax character of distributions paid during the years ended October 31, 2007
and October 31, 2006, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2007 2006
Distributions paid from:
Ordinary Income $13,516,479 $ 9,536,626
Long-Term Capital Gains 53,968,910 28,780,000
- -----------------------------------------------------------
$67,485,389 $38,316,626
- -----------------------------------------------------------
</Table>
NOTE 5--FOREIGN CURRENCY AND WRITTEN OPTIONS:
Foreign Currency held at October 31, 2007:
<Table>
<Caption>
CURRENCY COST VALUE
Japanese Yen Y 15,200,432 $132,327 $131,760
Hong Kong Dollar HKD 1,352 174 174
Euro E 77,289 111,770 111,957
Singapore Dollar SGD 99,535 66,450 68,796
Swiss Franc CHF 118,313 101,522 102,135
- ----------------------------------------------------------------------------------
$412,243 $414,822
- ----------------------------------------------------------------------------------
</Table>
During the year ended October 31, 2007, the Fund had the following transactions
in written options:
<Table>
<Caption>
NUMBER OF
CONTRACTS PREMIUM
Options Outstanding at
October 31, 2006 -- $ --
- ------------------------------------------------------------------------
Options--Written 170 52,189
- ------------------------------------------------------------------------
Options--Expired -- --
- ------------------------------------------------------------------------
Options--Canceled in closing transactions (170) (52,189)
- ------------------------------------------------------------------------
Options Outstanding at
October 31, 2007 -- $ --
- ------------------------------------------------------------------------
</Table>
NOTE 6--RESTRICTED SECURITIES:
As of October 31, 2007, the Fund held restricted securities as follows:
<Table>
<Caption>
SHARES/
DATE(S) OF NUMBER OF 10/31/07 PERCENTAGE OF
SECURITY ACQUISITION WARRANTS COST VALUE NET ASSETS
QuadraMed Corp.
Convertible
Preferred Stock 6/16/04 10,700 $267,500 $251,450 0.04%
- ------------------------------------------------------------------------------------
$267,500 $251,450 0.04%
- ------------------------------------------------------------------------------------
</Table>
NOTE 7--CUSTODIAN:
SSBT is the custodian of cash and securities of the Fund. Custodial fees are
charged to the Fund based on the market value of securities in the Fund and the
number of certain cash transactions incurred by the Fund.
NOTE 8--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. These funds pay a commitment fee, at an annual rate of .060% of the
average commitment amount, regardless of usage, to The Bank of New York, which
acts as agent to the syndicate. Such commitment fees are allocated among the
funds based upon net assets and other factors. Interest on any revolving credit
loan is charged based upon the Federal Funds Advances rate. There were no
borrowings made or outstanding on the line of credit during the year ended
October 31, 2007.
NOTE 9--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2007, purchases and sales of U.S. Government
securities were $77,016 and $91,763, respectively. Purchases and sales of
securities, other than U.S. Government securities and short-term securities,
were $378,379 and $461,530, respectively.
www.mainstayfunds.com 35
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 821 $ 15,818
Shares issued to shareholders in
reinvestment of dividends: 2,566 48,055
Shares redeemed (4,957) (95,704)
---------------------
Net decrease in shares outstanding
before conversion (1,570) (31,831)
Shares converted from Class B (See Note
1) 2,021 38,755
---------------------
Net increase 451 $ 6,924
=====================
Year ended October 31, 2006:
Shares sold 2,815 $ 53,793
Shares issued to shareholders in
reinvestment of dividends: 490 9,352
Shares redeemed (5,256) (101,142)
---------------------
Net decrease in shares outstanding
before conversion (1,951) (37,997)
Shares converted from Class B (See Note
1) 22,107 417,375
---------------------
Net increase 20,156 $ 379,378
=====================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 559 $ 10,810
Shares issued to shareholders in
reinvestment of dividends: 943 17,644
Shares redeemed (1,904) (36,825)
----------------------
Net decrease in shares outstanding
before conversion (402) (8,371)
Shares reacquired upon conversion into
Class A (See Note 1) (2,016) (38,755)
----------------------
Net decrease (2,418) $ (47,126)
======================
Year ended October 31, 2006:
Shares sold 765 $ 14,735
Shares issued to shareholders in
reinvestment of dividends: 1,471 27,974
Shares redeemed (5,139) (98,709)
----------------------
Net decrease in shares outstanding
before conversion (2,903) (56,000)
Shares reacquired upon conversion into
Class A (See Note 1) (22,060) (417,375)
----------------------
Net decrease (24,963) $(473,375)
======================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 26 $ 495
Shares issued to shareholders in
reinvestment of dividends: 15 278
Shares redeemed (53) (1,027)
------------------
Net decrease (12) $ (254)
==================
Year ended October 31, 2006:
Shares sold 17 $ 320
Shares issued to shareholders in
reinvestment of dividends: 8 160
Shares redeemed (69) (1,316)
------------------
Net decrease (44) $ (836)
==================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 1 $ 23
Shares issued to shareholders in
reinvestment of dividends: --(a) 1
Shares redeemed (1) (8)
------------------
Net increase --(a) $ 16
==================
Year ended October 31, 2006:
Shares sold --(a) $ 9
Shares issued to shareholders in
reinvestment of dividends: --(a) 1
Shares redeemed --(a) (5)
------------------
Net decrease --(a) $ 5
==================
</Table>
(a) Less than one thousand.
NOTE 11--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission ("SEC") and the New York State
Attorney General, and, as noted in the notes to the year-end 2004, 2005 and 2006
financial statements of each fund of the Trust, NYLIM was previously a party to
arrangements with certain registered representatives of broker-dealers relating
to the level of trading by clients of those registered representatives in shares
of certain funds of the Trust. All such arrangements were terminated by the
fourth quarter of 2003.
NYLIM and the Trustees of the Trust undertook a review of the possible dilutive
effects that transactions under those arrangements and certain other levels of
trading by Fund shareholders over the period from 1999 to 2003 may have had on
the funds. As a result of this review, in December 2005, NYLIM made payments
totaling $5.882 million to
36 MainStay Total Return Fund
nine MainStay funds. The amount paid to the MainStay Total Return Fund was
$102,000. NYLIM has reimbursed or paid all expenses relating to the Board of
Trustees' review of this matter.
In a separate matter, in 2004 the SEC raised concerns relating to a guarantee
provided to shareholders of the MainStay Equity Index Fund and the fees and
expenses of that Fund as well as the related guarantee disclosure to that fund's
shareholders. Discussions have been held with the SEC concerning a possible
resolution of this matter. There can be no assurance of the outcome of these
efforts.
NOTE 12--NEW ACCOUNTING PRONOUNCEMENTS:
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation becomes effective for the Fund's 2008 fiscal
year, 2007, and is to be applied to all open tax years as of the date of
effectiveness. Based on Management's analysis, the determination has been made
that the adoption of the interpretation on November 1, 2007, did not have an
impact on the Fund's financial statements upon adoption. Management continually
reviews the Fund's tax positions and such conclusions under the Interpretation
based on factors, including, but not limited to, ongoing analyses of tax laws,
regulations and interpretations, thereof.
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The changes to current generally accepted accounting
principles from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures
about fair value measurements. As of October 31, 2007, the Fund does not believe
the adoption of SFAS No. 157 will impact the amounts reported in the Fund's
financial statements. However, additional disclosures may be required about the
inputs used to develop the measurements and the effect of certain measurements
reported in the financial statements for a fiscal period.
www.mainstayfunds.com 37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Total Return Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2007, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years or periods in the four-year
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the periods presented through October 31,
2003, were audited by other auditors, whose report dated December 18, 2003,
expressed an unqualified opinion thereon.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2007, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Total Return Fund of The MainStay Funds as of October 31, 2007, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years or periods in the four-year period then ended,
in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 20, 2007
38 MainStay Total Return Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with New York Life Investment Management LLC (the "Manager") and the
Subadvisory Agreement between the Manager and MacKay Shields LLC, a wholly-owned
indirect subsidiary of New York Life Investment Management Holdings LLC, an
affiliate of the Manager, (the "Subadvisor"), (each an "Agreement") at a meeting
held on May 22 and 23, 2007. In connection with the approval of each Agreement,
the Trustees reviewed a significant amount of a wide variety of information that
they had requested and received from the Manager and the Subadvisor, and data
and analysis from an outside data provider and a third party consultant. The
Trustees considered various industry trends and regulatory developments in their
deliberations. In considering approval of each Agreement, and in evaluating the
fairness of the compensation to be paid by the Fund, the Trustees met both as a
full Board and in executive session with no Interested Trustee present, in
advance of the meeting at which the Agreements were approved, and they
considered a number of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and the Subadvisor have provided historically to the Fund, and
also generally to other series of the Trust. Among other services, the Manager's
services have included investment management services, including monitoring and
evaluating the Subadvisor's investment program and investment results with
respect to the Fund, and the Subadvisor's compliance with the Fund's investment
policies and restrictions, and administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets,
and its other services include, among other services, providing reports to the
Manager and reviewing certain aspects of Fund filings. The Trustees considered,
among other things, the Manager's and Subadvisor's management, personnel,
resources, operations and portfolio management capabilities. The Board reviewed
reports on the Subadvisor's brokerage practices, including with respect to best
execution of portfolio trades. The Trustees considered the Manager's supervision
of the Fund's service providers and its attention to the compliance program of
the Trust, the Manager, the Subadvisor and certain other service providers, as
well as the Subadvisor's attention to its compliance program. The Trustees noted
the generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's underperformance over
various time periods considered relative to the investment performance of funds
having similar investment mandates, and the Manager's assurance that it would
monitor the Fund's performance closely.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information that indicated that the profitability to the Manager and its
affiliates from the Management Agreement with respect to the Fund was moderate,
and from the overall relationship with the Trust was low. The Trustees
considered other benefits that the Manager and its affiliates receive from the
relationship with the Trust, including benefits that NYLIFE Distributors and
MainStay Shareholder Services receive in exchange for services they provide to
the Funds, and certain benefits from soft dollar arrangements. The Trustees
acknowledged certain benefits to the reputation of the Manager and the Trust
from their association with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They considered that, across the Trust
(though not every series or share class), gross transfer agency fees tended to
be relatively high and, therefore, adversely affected gross expense ratios.
Noting that the Trust historically permitted smaller investor accounts, the
Trustees considered measures that had been recently implemented that were
intended to increase the average size of shareholder accounts, including
generally higher investment minimums, and small account fees, and the Trustees
considered
www.mainstayfunds.com 39
potential benefits to the Manager and its affiliates arising from such measures.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the Manager's willingness to implement
contractual breakpoints that would reduce the Fund's management fee at asset
levels above the breakpoints, and the fact that the breakpoints were intended to
provide that shareholders would share in benefits from economies of scale
obtained through the growth in the Fund's assets. The Trustees reviewed
information showing that the Fund's asset level had decreased over the past
several years but noted that the Fund's management fee rate had been reduced by
the breakpoint schedule applicable to the Fund. The Trustees reviewed
information about the potential effect of asset growth on Fund expenses, the
difficulty of forecasting its effect on the profitability of the Manager and its
affiliates, and the management fee breakpoints applicable to the Fund and
certain other funds. It was noted that, to the extent the Fund's gross expenses
currently were higher than its net expenses, the reduction of the Fund's gross
expenses through the achievement of economies of scale might benefit the Manager
by reducing the expenses the Manager must reimburse to the Fund rather than
directly benefiting the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by the
Fund, the Trustees evaluated factors such as the fees and expenses borne by
other registered funds in the market pursuing strategies generally similar to
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts having investment strategies similar to that
of the Fund, and took account of explanations and other information relating to
the fees and expenses of those other funds and accounts. The Trustees considered
the current and proposed contractual and net management fees, its anticipated
gross and net expense ratio, and various components of the expense ratio, in
comparison to other funds in comparison groupings. The Trustees generally
acknowledged the historical relationships among the Manager, the Subadvisor and
the Trust and the likely difficulties in implementing an alternative to the
investment management arrangement between the Trust and the Manager. The
Trustees took account of the Manager's willingness to maintain the management
fee waiver and expense limitation applicable to the Fund.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings, with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. This summary set out
above describes the most important, but not all, of the factors considered by
the Trustees in considering each Agreement. On the basis of their review, a
majority of the Trustees and a majority of the Non-Interested Trustees concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the judgment of a
majority of the Trustees and a majority of the Non-Interested Trustees that
approval of each Agreement was in the best interests of the Fund and its
shareholders.
40 MainStay Total Return Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advise shareholders within
60 days of the Fund's fiscal year end (October 31, 2007) as to the federal tax
status of dividends paid by the Fund during such fiscal year. Accordingly, the
Fund paid long-term capital gain distributions of $53,968,910.
The dividends paid by the Fund during the fiscal year ended October 31, 2007,
should be multiplied by 22.8% to arrive at the amount eligible for qualified
dividend income, 64.6% for qualified interest income and 25.6% for the corporate
dividends received deduction.
In January 2008, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2007. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2007.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
or (iii) on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 1-800-MAINSTAY (1-800-624-6782). You also can obtain and review copies
of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC
(information on the operation of the Public Reference Room may be obtained by
calling (1-800-SEC-0330).
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of The MainStay Funds (the
"Trust") was held on May 4, 2007, at the offices of New York Life Investment
Management LLC in Parsippany, New Jersey. The purpose of the meeting was to
elect the following individuals to the Board of Trustees of the Trust:
- Susan B. Kerley
- Alan R. Latshaw
- Peter Meenan
- Richard H. Nolan, Jr.
- Richard S. Trutanic
- Roman L. Weil
- John A. Weisser
- Brian A. Murdock (Interested Trustee)
There are no other Trustees of the Trust.
No other business came before the special meeting. The proposal to elect
Trustees was passed by the shareholders of the Fund as shown below:
<Table>
<Caption>
TOTAL
RETURN VOTES VOTES
FUND FOR WITHHELD ABSTENTIONS TOTAL
Susan B. Kerley 10,742,625.938 152,331.824 23,004.000 10,917,961.762
- ----------------------------------------------------------------------------
Alan R. Latshaw 10,748,526.330 146,431.432 23,004.000 10,917,961.762
- ----------------------------------------------------------------------------
Peter Meenan 10,750,441.076 144,234.882 23,004.000 10,917,961.762
- ----------------------------------------------------------------------------
Richard H.
Nolan, Jr. 10,751,441.076 143,516.686 23,004.000 10,917,961.762
- ----------------------------------------------------------------------------
Richard S.
Trutanic 10,751,809.995 143,147.767 23,004.000 10,917,961.762
- ----------------------------------------------------------------------------
Roman L. Weil 10,747,916.646 147,041.116 23,004.000 10,917,961.762
- ----------------------------------------------------------------------------
John A. Weisser 10,743,713.992 151,243.770 23,004.000 10,917,961.762
- ----------------------------------------------------------------------------
Brian A. Murdock 10,743,977.909 150,979.853 23,004.000 10,917,961.762
- ----------------------------------------------------------------------------
</Table>
This resulted in approval of the proposal.
www.mainstayfunds.com 41
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Pursuant to
notice, a Special Meeting of Shareholders of the Trust was held on May 4, 2007,
at NYLIM's offices in Parsippany, New Jersey. The Trustees listed below were
elected to serve the Trust effective June 7, 2007.
Each Trustee serves until his or her successor is elected and qualified or until
his or her resignation, death or removal. The Retirement Policy provides that a
Trustee shall tender his or her resignation upon reaching age 72. A Trustee
reaching the age of 72 may continue for additional one-year periods with the
approval of the Board's Nominating and Governance Committee, except that no
Trustee shall serve on the Board past his or her 75th birthday. Officers serve a
term of one year and are elected annually by the Trustees. The business address
of each Trustee and officer listed below is 51 Madison Avenue, New York, New
York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF FUNDS
POSITION(S) HELD IN FUND COMPLEX
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
BRIAN A. MURDOCK Indefinite; Member of the Board of Managers 73 Trustee, Eclipse Funds since
3/14/56 Trustee and Chief and President (since 2004) and June, 2007 (3 funds); Director,
Executive Officer Chief Executive Officer (since Eclipse Funds Inc. since June
since 2006 2006), New York Life Investment 2007 (22 funds); Director,
Management LLC and New York MainStay VP Series Fund, Inc.,
Life Investment Management since 2006 (24 portfolios);
Holdings LLC; Senior Vice Director, ICAP Funds, Inc.,
President, New York Life since 2006 (3 funds)
Insurance Company (since 2004);
Chairman of the Board and
President, NYLIFE Distributors
LLC (since 2004); Member of the
Board of Managers, NYLCAP
Manager LLC and Madison Capital
Funding LLC (since 2004),
MacKay Shields LLC and
Institutional Capital LLC
(since 2006), and McMorgan &
Company LLC (since 2007); Chief
Executive Officer, Eclipse
Funds and Eclipse Funds Inc.
(since 2006); Chairman (2006 to
2007) and Director and Chief
Executive Officer (since 2006),
MainStay VP Series Fund, Inc.;
Director and Chief Executive
Officer, ICAP Funds, Inc.
(since 2006); Chief Investment
Officer, MLIM Europe and Asia
(2001 to 2003); President of
Merrill Japan and Chairman of
MLIM's Pacific Region (1999 to
2001)
-----------------------------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow Capital
Management, Inc., McMorgan & Company LLC, NYLIFE Securities Inc. and/or NYLIFE
Distributors LLC, as described in detail above in the column "Principal
Occupation(s) During Past Five Years."
42 MainStay Total Return Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. KERLEY Indefinite; Partner, Strategic Management 73 Chairman since 2005 and Trustee
8/12/51 Chairman and Advisors LLC (since 1990) since 2000, Eclipse Funds (3
Trustee since funds); Chairman since 2005 and
June 2007 Director since 1990, Eclipse
Funds Inc. (22 funds); Chairman
and Director, ICAP Funds, Inc.,
since 2006 (3 funds); Chairman
and Director, MainStay VP
Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
Legg Mason Partners Funds,
Inc., since 1991 (30
portfolios)
----------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & Young 73 Trustee, Eclipse Funds since
3/27/51 Trustee and Audit LLP (2002 to 2003); Partner, June 2007 (3 funds); Director,
Committee Arthur Andersen LLP (1989 to Eclipse Funds Inc. since June
Financial Expert 2002); Consultant to the Audit 2007 (22 funds); Director, ICAP
since 2006 and Compliance Committee of The Funds, Inc., since June 2007 (3
MainStay Funds (2004 funds); Director, MainStay VP
to 2006) Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
State Farm Associates Funds
Trusts since 2005 (3
portfolios); Trustee, State
Farm Mutual Fund Trust since
2005 (15 portfolios); Trustee,
State Farm Variable Product
Trust since 2005 (9 portfolios)
----------------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds since
12/5/41 Trustee since President and Chief Executive 2002 (3 funds); Director,
June 2007 Officer, Babson-United, Inc. Eclipse Funds Inc. since 2002
(financial services firm) (2000 (22 funds); Director, ICAP
to 2004); Independent Funds, Inc.,
Consultant (1999 to 2000); Head since 2006 (3 funds); Director,
of Global Funds, Citicorp (1995 MainStay VP Series Fund, Inc.,
to 1999) since June 2007 (24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 73 Trustee, Eclipse Funds since
NOLAN, JR. Trustee since Management; President--Shields/ June 2007 (3 funds); Director,
11/16/46 June 2007 Alliance, Alliance Capital Eclipse Funds Inc. since June
Management (1994 to 2004) 2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 2006
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman (since 1990) and Chief 73 Trustee, Eclipse Funds since
TRUTANIC Trustee since Executive Officer (1990 to June 2007 (3 funds); Director,
2/13/52 1994 1999), Somerset Group Eclipse Funds Inc. since June
(financial advisory firm); 2007 (22 funds); Director, ICAP
Managing Director and Advisor, Funds, Inc., since June 2007 (3
The Carlyle Group (private funds); Director, MainStay VP
investment firm) (2002 to Series Fund, Inc., since June
2004); Senior Managing Director 2007 (24 portfolios)
and Partner, Groupe Arnault
S.A. (private investment firm)
(1999
to 2002)
----------------------------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 43
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEE
ROMAN L. WEIL Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds since
5/22/40 Trustee and Audit Accounting, Graduate School of June 2007 (3 funds); Director,
Committee Business, University of Eclipse Funds Inc. since June
Financial Expert Chicago; President, Roman L. 2007 (22 funds); Director, ICAP
since June 2007 Weil Associates, Inc. Funds, Inc., since June 2007 (3
(consulting firm) funds); Director, MainStay VP
Series Fund, Inc., since 1994
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 73 Trustee, Eclipse Funds since
10/22/41 Trustee since Salomon Brothers, Inc. (1971 to June 2007 (3 funds); Director,
June 2007 1995) Eclipse Funds Inc. since June
2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 1997
(24 portfolios); Trustee,
Direxion Funds (69 funds) and
Direxion Insurance Trust (45
funds) since March 2007
----------------------------------------------------------------------------------------------------------------------
</Table>
Terry L. Lierman resigned as Trustee of the Trust effective May 31, 2007. Edward
J. Hogan, John B. McGuckian and Donald E. Nickelson resigned as Trustees of the
Trust effective June 7, 2007.
At a meeting of the Board of Trustees held on June 7 and 8, 2007, the following
individuals were appointed to serve as Officers of the Trust effective June 7,
2007:
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ROBERT A. Chief Legal Senior Managing Director, General Counsel and Secretary, New
ANSELMI Officer since York Life Investment Management LLC (including predecessor
10/19/46 2004 advisory organizations) (since 2000); Secretary (since 2001)
and General Counsel (since 2004), New York Life Investment
Management Holdings LLC; Senior Vice President, New York
Life Insurance Company (since 2000); Vice President and
Secretary, McMorgan & Company LLC (since 2001); Secretary,
NYLIM Service Company LLC (since 2005), NYLCAP Manager LLC
(since 2004), Madison Capital Funding LLC (since 2002), and
Institutional Capital LLC (since 2006); Chief Legal Officer,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), McMorgan Funds (since 2005) and
ICAP Funds, Inc. (since 2006); Managing Director and Senior
Counsel, Lehman Brothers Inc. (1998 to 1999); General
Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998)
-------------------------------------------------------------------------------------------------
JACK R. Treasurer and Managing Director, New York Life Investment Management LLC
BENINTENDE Principal (since June 2007); Treasurer and Principal Financial and
5/12/64 Financial and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
Accounting MainStay VP Series Fund, Inc., and ICAP Funds, Inc. (since
Officer since June 2007); Vice President, Prudential Investments (2000 to
June 2007 2007); Assistant Treasurer, JennisonDryden Family of Funds,
Target Portfolio Trust, The Prudential Series Fund and
American
Skandia Trust (2006 to 2007); Treasurer and Principal
Financial Officer, The Greater China
Fund (2007)
-------------------------------------------------------------------------------------------------
STEPHEN P. President since Senior Managing Director and Chief Marketing Officer, New
FISHER March 2007 York Life Investment Management LLC (since 2005); Managing
2/22/59 Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since March 2007); Managing Director, UBS
Global Asset Management (1999 to 2003)
-------------------------------------------------------------------------------------------------
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration predecessor advisory organizations) (since 2000); Executive
2/8/59 since 2005 Vice President, New York Life Trust Company (since 2006);
Vice President--Administration, Eclipse Funds, Eclipse Funds
Inc. and MainStay VP Series Fund, Inc. (since 2005) and ICAP
Funds, Inc. (since 2006)
-------------------------------------------------------------------------------------------------
</Table>
44 MainStay Total Return Fund
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Senior Managing Director and Chief Compliance Officer (since
MICUCCI President and 2006) and Managing Director and Chief Compliance Officer
12/16/65 Chief Compliance (2003 to 2006), New York Life Investment Management LLC and
Officer since New York Life Investment Management Holdings LLC; Senior
2006 Managing Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE Distributors
LLC; Chief Compliance Officer, NYLCAP Manager LLC (since
2006); Senior Vice President and Chief Compliance Officer,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund,
Inc., and ICAP Funds, Inc. (since 2006); Vice President--
Compliance, Eclipse Funds, Eclipse Funds Inc. and MainStay
VP Series Fund, Inc. (2004 to 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002)
-------------------------------------------------------------------------------------------------
MARGUERITE E.H. Secretary since Managing Director and Associate General Counsel, New York
MORRISON* 2004 Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC (since
2005); Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP Funds,
Inc. (since 2006); Chief Legal Officer--Mutual Funds and
Vice President and Corporate Counsel, The Prudential
Insurance Company of America (2000 to 2004)
-------------------------------------------------------------------------------------------------
</Table>
* In addition to serving as Secretary to the Trust, effective January 1, 2008,
Marguerite E.H. Morrison will assume the role of Chief Legal Officer to the
Trust.
Arphiela Arizmendi resigned as Treasurer and Principal Financial and Accounting
Officer of the Trust effective June 7, 2007.
Christopher O. Blunt resigned as President of the Trust effective March 12,
2007.
Alan J. Kirshenbaum resigned as Senior Vice President of the Trust effective
March 19, 2007.
www.mainstayfunds.com 45
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay 130/30 Core Fund
MainStay 130/30 Growth Fund
MainStay All Cap Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay 130/30 High Yield Fund(2)
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay 130/30 International Fund
MainStay Global High Income Fund
MainStay ICAP International Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
RETIREMENT FUNDS
MainStay Retirement 2010 Fund
MainStay Retirement 2020 Fund
MainStay Retirement 2030 Fund
MainStay Retirement 2040 Fund
MainStay Retirement 2050 Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
New York, New York
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
Chicago, Illinois
MACKAY SHIELDS LLC(3)
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
MCMORGAN & COMPANY LLC(3)
San Francisco, California
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
(NEW YORK LIFE INVESTMENT MANAGEMENT LLC LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2007 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A011872 (RECYCLE SYMBOL) MS329-07 MSTR11-12/07
14
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
VALUE FUND
Message from the President
and
Annual Report
October 31, 2007
MESSAGE FROM
THE PRESIDENT
The 12-month period ended October 31, 2007, was a dynamic one for mutual fund
investors. U.S. equity markets generally advanced, with growth stocks out-
performing value stocks at all capitalization levels. Although past performance
is no guarantee of future results, international stocks as a whole provided even
stronger returns for U.S. investors.
The progress of the equity markets, however, was far from steady. In February,
weakness in Asian markets led to sharp price declines around the globe. The
correction caused many investors to reconsider whether China and other emerging
economies could sustain their rapid growth. Fortunately, strong
corporate-earnings reports and positive economic news helped the stock market
regain its footing.
In July and August, difficulties in the subprime-mortgage market led to another
stock-market correction. A number of high-profile mortgage originators either
closed their doors or were sold to larger entities. Other leading financial
services firms faced major write-offs because of subprime-mortgage exposure.
The Federal Open Market Committee (FOMC) took prompt action to increase
liquidity and stabilize the financial markets by lowering the discount rate and
the federal funds target rate during the reporting period. These Federal Reserve
moves helped calm investor concerns, and the stock market generally advanced
from August 16, 2007, the date of an unscheduled FOMC meeting, through the end
of October 2007.
Difficulties in the subprime-mortgage market led to a "flight to quality," or a
general movement toward fixed-income securities that carry lower risk. As demand
for short- and intermediate-term Treasury securities increased, yields fell
across much of the maturity spectrum. Yields rose, however, on 20-and 30-year
Treasury bonds, and the yield curve steepened during the 12-month reporting
period.
High-yield bonds rallied from November 2006 through May 2007. But in June and
July, the yield differences--or spreads--between high-yield bonds and comparable
Treasury securities began to widen. At the end of October 2007, these spreads
were wider than when the reporting period began, making high-yield securities
more attractive to investors willing to accept higher risk.
To help investors address the challenges of today's ever-changing markets, New
York Life Investment Management LLC provides access to seven institutional
investment boutiques, each with its own proprietary research and investment
culture. As advisors and subadvisors to MainStay Funds, these boutiques bring a
wealth of experience and market insight to our shareholders. The portfolio
managers of each MainStay Fund seek to consistently apply time-tested investment
principles across a wide variety of market environments.
The report that follows provides more specific information about the market
forces and investment decisions that affected your investment in MainStay Funds
from November 1, 2006, through October 31, 2007. Please read the report
carefully. As you do, bear in mind that this annual report reflects just a short
segment of your lifetime investment journey. We look forward to continuing to
work with you, wherever that journey may lead.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
VALUE FUND
MainStay Funds
Annual Report
October 31, 2007
TABLE OF CONTENTS
<Table>
Annual Report
- --------------------------------------------------------------------------------
Investment and Performance Comparison 5
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 14
- --------------------------------------------------------------------------------
Notes to Financial Statements 22
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 29
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 30
- --------------------------------------------------------------------------------
Federal Income Tax Information 32
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures and Proxy Voting Record 32
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 32
- --------------------------------------------------------------------------------
Special Meeting of Shareholders 32
- --------------------------------------------------------------------------------
Trustees and Officers 33
</Table>
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT
MONTH-END PERFORMANCE INFORMATION, PLEASE CALL 1-800-MAINSTAY (1-800-624-6782)
OR VISIT WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ----------------------------------------------------
With sales charges 6.28% 13.05% 5.11%
Excluding sales charges 12.46 14.34 5.71
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY VALUE FUND CLASS A RUSSELL 1000 VALUE INDEX
--------------------------- ------------------------
10/31/97 9450 10000
9375 11483
9974 13380
11078 14118
10315 12444
8426 11197
10177 13758
11333 15884
12481 17769
14640 21582
10/31/07 16464 23920
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ----------------------------------------------------
With sales charges 6.68% 13.25% 4.92%
Excluding sales charges 11.66 13.49 4.92
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY VALUE FUND CLASS B RUSSELL 1000 VALUE INDEX
--------------------------- ------------------------
10/31/97 10000 10000
9847 11483
10391 13380
11459 14118
10585 12444
8582 11197
10289 13758
11375 15884
12429 17769
14472 21582
10/31/07 16159 23920
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ----------------------------------------------------
With sales charges 10.61% 13.48% 4.91%
Excluding sales charges 11.61 13.48 4.91
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY VALUE FUND CLASS C RUSSELL 1000 VALUE INDEX
--------------------------- ------------------------
10/31/97 10000 10000
9847 11483
10391 13380
11459 14118
10585 12444
8582 11197
10289 13758
11375 15884
12429 17769
14472 21582
10/31/07 16152 23920
</Table>
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect maximum applicable sales charges explained in this paragraph, change in
share price, and reinvestment of dividend and capital-gain distributions. The
graphs assume an initial investment of $10,000 and reflect the deduction of all
sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase and have an annual 12b-1 fee of 1.00%.
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee and are generally available to corporate and institutional investors
with a minimum initial investment of $5 million. Class R1 shares are sold with
no initial sales charge or CDSC and have no annual 12b-1 fee. Class R2 shares
are sold with no initial sales charge or CDSC and have an annual 12b-1 fee of
..25%. Class R1 and Class R2 shares are available only through
corporate-sponsored retirement programs, which include certain minimum program
requirements. Performance figures reflect certain fee waivers and/or expense
limitations, without which total returns may have been lower. These fee waivers
and/or expense limitations are contractual and may be modified or terminated
only with the approval of the Board of Trustees. The Manager may recoup the
amount of certain management fee waivers or expense reimbursements from the Fund
pursuant to the contract if such action does not cause the Fund to exceed
existing expense limitations and the recoupment
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ----------------------------------------------------
13.00% 14.72% 5.99%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY VALUE FUND CLASS I RUSSELL 1000 VALUE INDEX
--------------------------- ------------------------
10/31/97 10000 10000
9945 11483
10597 13380
11797 14118
11001 12444
9006 11197
10905 13758
12186 15884
13448 17769
15839 21582
10/31/07 17898 23920
</Table>
CLASS R1 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ----------------------------------------------------
12.89% 14.63% 5.90%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY VALUE FUND CLASS R1 RUSSELL 1000 VALUE INDEX
---------------------------- ------------------------
10/31/97 10000 10000
9930 11483
10568 13380
11761 14118
10957 12444
8962 11197
10839 13758
12103 15884
13351 17769
15711 21582
10/31/07 17736 23920
</Table>
CLASS R2 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ----------------------------------------------------
12.48% 14.32% 5.63%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY VALUE FUND CLASS R2 RUSSELL 1000 VALUE INDEX
---------------------------- ------------------------
10/31/97 10000 10000
9909 11483
10525 13380
11679 14118
10855 12444
8859 11197
10686 13758
11901 15884
13093 17769
15379 21582
10/31/07 17297 23920
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- -------------------------------------------------------------------------------
Russell 1000(R) Value Index(2) 10.83% 16.39% 9.11%
Average Lipper large-cap value fund(3) 12.21 14.67 7.23
</Table>
is made within three years after the year in which the Manager incurred the
expense. Prior to 9/1/98 (for Class C shares) and 12/31/03 (for Class I, R1 and
R2 shares), performance for Class C, I, R1 and R2 shares includes the historical
performance of Class B shares adjusted to reflect the applicable sales charge
(or CDSC), fees, estimated expenses and fee waivers/expense limitations of Class
C, I, R1 and R2 shares upon initial offer. Unadjusted, the performance shown for
the newer classes of shares might have been lower.
1. Performance figures shown reflect nonrecurring reimbursements from affiliates
for professional fees and losses attributable to shareholder trading
arrangements. If these nonrecurring reimbursements had not been made the
total return (excluding sales charges) would have been 14.33% for Class A,
13.45% for Class B, 13.47% for Class C, 14.72% for Class I, 14.62% for Class
R1 and 14.31% for Class R2 for the five-year period ended October 31, 2007,
and 5.70% for Class A, 4.90% for Class B, 4.91% for Class C, 5.99% for Class
I, 5.89% for Class R1 and 5.63% for Class R2 for the ten-year period then
ended.
2. The Russell 1000(R) Value Index is an unmanaged index that measures the
performance of those Russell 1000(R) companies with lower price-to-book
ratios and lower forecasted growth values. The Russell 1000(R) Index is an
unmanaged index that measures the performance of the 1,000 largest U.S.
companies based on total market capitalization. Results assume reinvestment
of all income and capital gains. The Russell 1000(R) Value Index is
considered to be the Fund's broad-based securities-market index for
comparison purposes. An investment cannot be made directly in an index.
3. Lipper Inc. is an independent monitor of fund performance. Results are based
on total returns with all dividend and capital-gain distributions reinvested.
THE DISCLOSURE ON THE PRECEDING PAGE IS AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Value Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY VALUE FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2007, to October 31, 2007,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1,
2007, to October 31, 2007.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six-months ended October 31, 2007. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/07 10/31/07 PERIOD(1) 10/31/07 PERIOD(1)
CLASS A SHARES $1,000.00 $1,032.65 $5.99 $1,019.15 $5.95
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,029.00 $9.82 $1,015.40 $9.75
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,028.50 $9.82 $1,015.40 $9.75
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,034.90 $3.59 $1,021.50 $3.57
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,034.35 $4.26 $1,020.85 $4.23
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,032.30 $5.43 $1,019.70 $5.40
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's net annualized expense ratio of each class
(1.17% for Class A, 1.92% for Class B and Class C, 0.70% for Class I, 0.83%
for Class R1 and 1.06% for Class R2) multiplied by the average account value
over the period, divided by 365 and multiplied by 184 (to reflect the
one-half year period).
www.mainstayfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2007
(COMPOSITION PIE CHART)
<Table>
Common Stocks 99.2
Short-Term Investments (collateral from securities lending 5.2
is 4.2%)
Purchased Call Options 0.0*
Liabilities in Excess of Cash and Other Assets (4.4)
</Table>
* Less than one-tenth of a percent.
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2007 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Bank of America Corp.
2. Intel Corp.
3. ExxonMobil Corp.
4. Citigroup, Inc.
5. CVS Caremark Corp.
6. Chevron Corp.
7. AT&T, Inc.
8. PNC Financial Services Group, Inc.
9. Suncor Energy, Inc.
10. Verizon Communications, Inc.
</Table>
8 MainStay Value Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Richard A. Rosen, CFA, of MacKay Shields
LLC
HOW DID MAINSTAY VALUE FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK
DURING THE 12-MONTH REPORTING PERIOD?
Excluding all sales charges, MainStay Value Fund returned 12.46% for Class A
shares, 11.66% for Class B shares and 11.61% for Class C shares for the 12
months ended October 31, 2007. Over the same period, the Fund's Class I shares
returned 13.00%, Class R1 shares returned 12.89% and Class R2 shares returned
12.48%. With the exception of Class B and Class C shares, all share classes
outperformed the 12.21% return of the average Lipper(1) large-cap value fund for
the 12 months ended October 31, 2007. All share classes outperformed the 10.83%
return of the Russell 1000(R) Value Index,(2) the Fund's broad-based
securities-market index, for the 12-month reporting period. See page 5 for Fund
returns with sales charges.
WHICH FUND HOLDINGS WERE PARTICULARLY STRONG DURING THE REPORTING PERIOD?
As a group, financial stocks tended to underperform during the reporting period.
Fortunately, the Fund maintained an underweight position in the sector and
avoided most of the stocks that experienced major corrections because of credit
or subprime-mortgage exposure. As a result, financials provided a significant
positive contribution to the Fund's relative performance. The Fund's positions
in Bank of New York, Goldman Sachs and Prudential Financial bucked the trend and
performed well. We reduced the Fund's position in Goldman Sachs as its shares
approached our price target.
In the information technology sector, Nokia Oyj's shares more than doubled
during the reporting period as the company gained market share, particularly in
emerging markets. We trimmed the Fund's position in Nokia Oyj as its shares
approached our price target. We added to the Fund's positions in Intel and IBM
during the reporting period, and both stocks recorded substantial gains.
Higher energy prices helped several of the Fund's energy holdings, including
drillers GlobalSantaFe, Diamond Offshore Drilling and Transocean. Each of these
stocks rose sharply, and Transocean's acquisition bid for GlobalSantaFe
highlighted significant asset value in the energy equipment & services industry.
We reduced the Fund's holdings in Diamond Offshore Drilling and GlobalSantaFe
and eliminated the Transocean position as the stocks approached their respective
price targets.
Other positive performers included Honeywell International, CVS Caremark, Teck
Cominco, Teva Pharmaceuticals and KOS Pharmaceuticals. Honeywell demonstrated
strong earnings growth and initiated a new share buyback program. We reduced the
Fund's position in the stock near our price target. Pharmacy and front-store
sales trends at CVS Caremark remained positive and the integration of Caremark
into the combined company proceeded well. We added to the Fund's CVS Caremark
position in the middle of the reporting period. Teva Pharmaceuticals benefited
from good trends in the generic drug industry. We added to the Fund's Teva
Pharmaceuticals position early in the reporting period and trimmed the position
late in the period. KOS Pharmaceuticals' shares rose when the company became the
target of an acquisition bid by Abbott Laboratories.
WHICH POSITIONS DETRACTED FROM THE FUND'S PERFORMANCE DURING THE REPORTING
PERIOD?
In the financials sector, Genworth Financial, Freddie Mac, Capital One Financial
and PMI Group all detracted from the Fund's performance. Our assessment of the
negative shift in company fundamentals led us to eliminate PMI Group and reduce
the Fund's positions in the other companies.
Additional stocks that detracted from the Fund's performance included Home
Depot, Lowe's, The Gap and Amgen. Sales at Home Depot and Lowe's suffered from
the housing downturn. We reduced the Fund's position in Home Depot and added to
Lowe's. We sold the Fund's entire position in The Gap, as the company continued
to struggle with its fashion initiatives. Amgen, a new position during the
reporting period, declined on concerns about the safety of one of the company's
key drug families.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
In addition to the transactions we've already mentioned, we added oil sands
producer Suncor Energy to the Fund, and its shares rose sharply from the time of
purchase through the end of October. Teck Cominco, another addition during the
reporting period, benefited from high copper and zinc prices.
The principal risk of investing in value stocks is that they may never reach
what the portfolio manager believes is their full value or they may even go down
in value. The Fund may experience a portfolio turnover rate of more than 100%
and may generate taxable short-term gains.
1. See footnote on page 6 for more information on Lipper Inc.
2. See footnote on page 6 for more information on the Russell 1000(R) Value
Index.
www.mainstayfunds.com 9
Several information technology stocks showed poor performance and were
eliminated from the Fund. We sold all of the Fund's holdings in Motorola and
Advanced Micro Devices. Both companies were losing market share, and we no
longer felt that their reward potential justified the inherent risks.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2007, the Fund was overweight relative to the Russell 1000(R)
Value Index in health care, information technology, materials and consumer
staples. On the same date, the Fund was underweight in consumer discretionary,
financials, industrials, telecommunication services, energy and utilities.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecasts made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
10 MainStay Value Fund
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2007
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (99.2%)+
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (3.0%)
Honeywell International, Inc. 149,600 $ 9,037,336
Northrop Grumman Corp. 139,200 11,639,904
------------
20,677,240
------------
AIR FREIGHT & LOGISTICS (1.0%)
FedEx Corp. 69,900 7,223,466
------------
BIOTECHNOLOGY (1.3%)
Amgen, Inc. (a)(b) 152,900 8,885,019
------------
CAPITAL MARKETS (5.7%)
Bank of New York Mellon Corp. (The) 290,378 14,184,965
Goldman Sachs Group, Inc. (The) 45,400 11,255,568
Merrill Lynch & Co., Inc. 100,900 6,661,418
Morgan Stanley 120,600 8,111,556
------------
40,213,507
------------
CHEMICALS (1.8%)
E.I. du Pont de Nemours & Co. 258,900 12,818,139
------------
COMMERCIAL BANKS (3.9%)
V PNC Financial Services Group, Inc. 234,500 16,921,520
Wells Fargo & Co. 305,500 10,390,055
------------
27,311,575
------------
COMMERCIAL SERVICES & SUPPLIES (1.0%)
Avery Dennison Corp. 124,900 7,231,710
------------
COMMUNICATIONS EQUIPMENT (1.5%)
Nokia OYJ, Sponsored ADR (c) 255,600 10,152,432
------------
COMPUTERS & PERIPHERALS (1.8%)
International Business Machines Corp. 107,900 12,529,348
------------
CONSUMER FINANCE (0.4%)
Capital One Financial Corp. 43,500 2,853,165
------------
DIVERSIFIED FINANCIAL SERVICES (8.0%)
V Bank of America Corp. 457,026 22,065,215
V Citigroup, Inc. 479,466 20,089,625
JPMorgan Chase & Co. 288,392 13,554,424
------------
55,709,264
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (4.7%)
V AT&T, Inc. 417,100 17,430,609
V Verizon Communications, Inc. 332,600 15,322,882
------------
32,753,491
------------
</Table>
<Table>
<Caption>
SHARES VALUE
ELECTRIC UTILITIES (1.5%)
Duke Energy Corp. 154,500 $ 2,961,765
FirstEnergy Corp. 113,100 7,883,070
------------
10,844,835
------------
ENERGY EQUIPMENT & SERVICES (2.7%)
Diamond Offshore Drilling, Inc. 68,700 7,778,901
GlobalSantaFe Corp. 135,800 11,003,874
------------
18,782,775
------------
FOOD & STAPLES RETAILING (5.7%)
V CVS Caremark Corp. 469,000 19,590,130
Kroger Co. (The) 325,700 9,572,323
Wal-Mart Stores, Inc. 231,800 10,479,678
------------
39,642,131
------------
FOOD PRODUCTS (1.4%)
General Mills, Inc. 168,300 9,715,959
------------
HEALTH CARE PROVIDERS & SERVICES (2.3%)
Quest Diagnostics, Inc. 105,500 5,610,490
UnitedHealth Group, Inc. 212,300 10,434,545
------------
16,045,035
------------
HOTELS, RESTAURANTS & LEISURE (1.2%)
Carnival Corp. 176,700 8,478,066
------------
HOUSEHOLD PRODUCTS (1.1%)
Kimberly-Clark Corp. 112,100 7,946,769
------------
INDUSTRIAL CONGLOMERATES (2.0%)
General Electric Co. 344,100 14,163,156
------------
INSURANCE (5.0%)
Genworth Financial, Inc. Class A 397,300 10,846,290
Hartford Financial Services Group, Inc. (The) 115,700 11,226,371
Prudential Financial, Inc. 133,000 12,863,760
------------
34,936,421
------------
IT SERVICES (2.3%)
Affiliated Computer Services, Inc. Class A (a) 166,900 8,455,155
Computer Sciences Corp. (a) 132,400 7,730,836
------------
16,185,991
------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2007 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
MACHINERY (0.8%)
Pentair, Inc. (b) 164,100 $ 5,807,499
------------
MEDIA (0.8%)
Comcast Corp. Class A (a) 261,450 5,503,523
------------
METALS & MINING (2.9%)
Alcoa, Inc. 146,100 5,784,099
Teck Cominco, Ltd. Class B (b) 292,700 14,635,000
------------
20,419,099
------------
MULTI-UTILITIES (0.6%)
Energy East Corp. 146,800 4,092,784
------------
OIL, GAS & CONSUMABLE FUELS (12.4%)
V Chevron Corp. 190,504 17,433,021
ConocoPhillips 166,100 14,111,856
V ExxonMobil Corp. 228,900 21,056,511
Hess Corp. 127,000 9,094,470
V Suncor Energy, Inc. 147,300 16,089,579
Valero Energy Corp. 130,800 9,212,244
------------
86,997,681
------------
PHARMACEUTICALS (8.3%)
Barr Pharmaceuticals, Inc. (a) 167,500 9,601,100
Johnson & Johnson 216,400 14,102,788
Pfizer, Inc. 592,300 14,576,503
Teva Pharmaceutical Industries, Ltd., Sponsored
ADR (c) 287,100 12,635,271
Wyeth 149,000 7,245,870
------------
58,161,532
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (4.3%)
V Intel Corp. 811,100 21,818,590
Texas Instruments, Inc. 254,600 8,299,960
------------
30,118,550
------------
SPECIALTY RETAIL (4.7%)
Bed Bath & Beyond, Inc. (a)(b) 138,100 4,687,114
Home Depot, Inc. (The) (b) 280,000 8,822,800
Lowe's Cos., Inc. 338,600 9,104,954
TJX Cos., Inc. 354,100 10,244,113
------------
32,858,981
------------
THRIFTS & MORTGAGE FINANCE (3.7%)
Fannie Mae 242,100 13,809,384
Freddie Mac 231,900 12,112,137
------------
25,921,521
------------
</Table>
<Table>
<Caption>
SHARES VALUE
TRADING COMPANIES & DISTRIBUTORS (0.3%)
WESCO International, Inc. (a)(b) 41,000 $ 1,912,650
------------
WIRELESS TELECOMMUNICATION SERVICES (1.1%)
Sprint Nextel Corp. 450,000 7,695,000
------------
Total Common Stocks
(Cost $557,928,002) 694,588,314
------------
<Caption>
NUMBER OF
CONTRACTS
PURCHASED CALL OPTIONS (0.0%)++
- --------------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES (0.0%)++
Coventry Health Care, Inc.
Strike Price $65.00
Expire 1/19/08 100,000 130,000
Strike Price $70.00
Expire 1/19/08 100,000 45,000
------------
Total Purchased Call Options
(Premium $293,460) 175,000
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (5.2%)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (1.0%)
Deutsche Bank Financial LLC
4.77%, due 11/1/07 $ 1,760,000 1,760,000
American Express Credit Corp.
4.75%, due 11/1/07 5,000,000 5,000,000
------------
Total Commercial Paper
(Cost $6,760,000) 6,760,000
------------
<Caption>
SHARES
INVESTMENT COMPANY (4.2%)
State Street Navigator Securities Lending Prime
Portfolio (d) 29,676,470 29,676,470
------------
Total Investment Company
(Cost $29,676,470) 29,676,470
------------
Total Short-Term Investments
(Cost $36,436,470) 36,436,470
------------
Total Investments
(Cost $594,657,932) 104.4% 731,199,784(e)
Liabilities in Excess of
Cash and Other Assets (4.4) (30,566,523)
------------- ------------
Net Assets 100.0% $700,633,261
============= ============
</Table>
12 MainStay Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
++ Less than one-tenth of a percent.
+++ All of the Fund's assets are maintained to cover "senior securities
transactions" which may include, but are not limited to, forwards, TBA's,
options and futures. These securities are marked-to-market daily and
reviewed against the value of the Fund's "senior securities" holdings to
ensure proper coverage for these transactions.
(a) Non-income producing security.
(b) Represents a security, or a portion thereof, which is out on loan. The
aggregate market value of such securities is $28,594,849; cash collateral of
$29,676,470 (included in liabilities) was received with which the Fund
purchased highly liquid short-term investments.
(c) ADR--American Depositary Receipt.
(d) Represents a security, or a portion thereof, purchased with cash collateral
received for securities on loan.
(e) At October 31, 2007, cost is $595,779,167 for federal income tax purposes
and net unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $147,596,975
Gross unrealized depreciation (12,176,358)
------------
Net unrealized appreciation $135,420,617
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 13
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2007
<Table>
ASSETS:
Investment in securities, at value
(identified cost $594,657,932) including
$28,594,849 market value of securities
loaned $ 731,199,784
Cash 14,372
Receivables:
Dividends and interest 943,415
Fund shares sold 64,674
Other assets 21,367
-------------
Total assets 732,243,612
-------------
LIABILITIES:
Securities lending collateral 29,676,470
Payables:
Fund shares redeemed 747,724
Manager (See Note 3) 416,350
Transfer agent (See Note 3) 330,300
NYLIFE Distributors (See Note 3) 275,387
Shareholder communication 105,640
Professional fees 34,780
Trustees 9,656
Custodian 6,292
Accrued expenses 7,752
-------------
Total liabilities 31,610,351
-------------
Net assets $ 700,633,261
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized $ 302,303
Additional paid-in capital 492,376,066
-------------
492,678,369
Accumulated undistributed net investment
income 3,430,834
Accumulated net realized gain on investments
and written option transactions 67,982,206
Net unrealized appreciation on investments 136,541,852
-------------
Net assets $ 700,633,261
=============
CLASS A
Net assets applicable to outstanding shares $ 531,440,392
=============
Shares of beneficial interest outstanding 22,872,479
=============
Net asset value per share outstanding $ 23.23
Maximum sales charge (5.50% of offering price) 1.35
-------------
Maximum offering price per share outstanding $ 24.58
=============
CLASS B
Net assets applicable to outstanding shares $ 156,553,450
=============
Shares of beneficial interest outstanding 6,808,161
=============
Net asset value and offering price per share
outstanding $ 22.99
=============
CLASS C
Net assets applicable to outstanding shares $ 12,475,287
=============
Shares of beneficial interest outstanding 542,586
=============
Net asset value and offering price per share
outstanding $ 22.99
=============
CLASS I
Net assets applicable to outstanding shares $ 151,792
=============
Shares of beneficial interest outstanding 6,526
=============
Net asset value and offering price per share
outstanding $ 23.26
=============
CLASS R1
Net assets applicable to outstanding shares $ 1,511
=============
Shares of beneficial interest outstanding 65
=============
Net asset value and offering price per share
outstanding $ 23.24*
=============
CLASS R2
Net assets applicable to outstanding shares $ 10,829
=============
Shares of beneficial interest outstanding 468
=============
Net asset value and offering price per share
outstanding $ 23.15*
=============
</Table>
* Difference in the NAV recalculation and NAV stated is caused by rounding
differences.
14 MainStay Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2007
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $15,815,933
Interest 1,535,928
Income from securities loaned--net 94,600
------------
Total income 17,446,461
------------
EXPENSES:
Manager (See Note 3) 4,678,384
Transfer agent--Classes A, B and C (See Note
3) 1,948,413
Transfer agent--Classes I, R1 and R2 (See
Note 3) 23,927
Distribution/Service--Class A (See Note 3) 1,326,476
Service--Class B (See Note 3) 444,551
Service--Class C (See Note 3) 32,894
Distribution/Service--Class R2 (See Note 3) 21,540
Distribution--Class B (See Note 3) 1,333,652
Distribution--Class C (See Note 3) 98,681
Professional fees 139,492
Shareholder communication 126,941
Recordkeeping 102,434
Registration 90,668
Trustees 41,793
Custodian 25,421
Shareholder service--Class R1 (See Note 3) 1
Shareholder service--Class R2 (See Note 3) 8,616
Miscellaneous 34,300
------------
Total expenses before waiver 10,478,184
Expense waiver from Manager (See Note 3) (320,473)
------------
Net expenses 10,157,711
------------
Net investment income 7,288,750
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS, WRITTEN OPTIONS
AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain on:
Security transactions 70,115,489
Written option transactions 143,057
Foreign currency transactions 739
------------
Net realized gain on investments, written
option transactions and foreign currency
transactions 70,259,285
------------
Net change in unrealized appreciation on
investments 10,585,895
------------
Net realized and unrealized gain on
investments, written option transactions and
foreign currency transactions 80,845,180
------------
Net increase in net assets resulting from
operations $88,133,930
============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$93,793.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 15
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2007 AND OCTOBER 31, 2006
<Table>
<Caption>
2007 2006
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 7,288,750 $ 5,880,874
Net realized gain on investments 70,259,285 81,695,197
Net increase from payments from
Manager for losses attributable
to shareholder trading
arrangements (See Note 3(B) on
page 24.) -- 374,000
Net change in unrealized
appreciation on investments 10,585,895 27,366,967
-----------------------------
Net increase in net assets
resulting from operations 88,133,930 115,317,038
-----------------------------
Dividends and distributions to shareholders:
From net investment income:
Class A (3,604,019) (4,624,242)
Class B (491,067) (1,094,995)
Class C (35,302) (51,601)
Class I (241,911) (90,908)
Class R1 (12) (18)
Class R2 (100,317) (150,386)
-----------------------------
(4,472,628) (6,012,150)
-----------------------------
From net realized gain on investments:
Class A (55,415,823) (155,358)
Class B (20,801,027) (680,455)
Class C (1,456,684) (15,559)
Class I (2,289,339) (1)
Class R1 (146) (1)
Class R2 (1,418,228) (15,002)
-----------------------------
(81,381,247) (866,376)
Total dividends and distributions
to shareholders (85,853,875) (6,878,526)
-----------------------------
</Table>
<Table>
<Caption>
2007 2006
Capital share transactions:
Net proceeds from sale of shares $ 52,364,803 $ 115,953,217
Net asset value of shares issued
to shareholders in reinvestment
of dividends and distributions 82,670,949 6,592,357
Cost of shares redeemed (188,175,701) (193,461,368)
Net asset value of shares converted
(See Note 1):
Class A 31,337,429 334,291,220
Class B (31,337,429) (334,291,220)
-----------------------------
Decrease in net assets derived
from capital share transactions (53,139,949) (70,915,794)
-----------------------------
Net increase (decrease) in net
assets (50,859,894) 37,522,718
NET ASSETS:
Beginning of year 751,493,155 713,970,437
-----------------------------
End of year $700,633,261 $ 751,493,155
=============================
Accumulated undistributed net
investment income at end of year $ 3,430,834 $ 613,972
=============================
</Table>
16 MainStay Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
www.mainstayfunds.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
---------------------------------------------------------------------------------
JANUARY 1, 2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2007 2006 2005 2004 2003
Net asset value at beginning of period $ 23.27 $ 20.09 $ 18.39 $ 16.56 $ 14.13
-------- -------- -------- -------- ----------------
Net investment income 0.26(a) 0.24(a) 0.16(a) 0.14(a) 0.11
Net realized and unrealized gain (loss) on
investments 2.39 3.21(e) 1.70 1.74 2.42
-------- -------- -------- -------- ----------------
Total from investment operations 2.65 3.45 1.86 1.88 2.53
-------- -------- -------- -------- ----------------
Less dividends and distributions:
From net investment income (0.15) (0.25) (0.16) (0.05) (0.10)
From net realized gain on investments (2.54) (0.02) -- -- --
-------- -------- -------- -------- ----------------
Total dividends and distributions (2.69) (0.27) (0.16) (0.05) (0.10)
-------- -------- -------- -------- ----------------
Net asset value at end of period $ 23.23 $ 23.27 $ 20.09 $ 18.39 $ 16.56
======== ======== ======== ======== ================
Total investment return (c) 12.46% 17.30%(d)(e) 10.13% 11.36% 18.02%(f)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.13% 1.11% 0.82% 0.77% 0.93%+
Net expenses 1.17% 1.17% 1.21% 1.30% 1.38%+
Expenses (before waiver/reimbursement) 1.21% 1.30%(d) 1.28% 1.30% 1.38%+
Portfolio turnover rate 50% 48% 43% 53% 47%
Net assets at end of period (in 000's) $531,440 $514,015 $128,918 $118,818 $112,745
<Caption>
CLASS A
------------
YEAR ENDED
DECEMBER 31,
2002
Net asset value at beginning of period $ 18.52
------------
Net investment income 0.12
Net realized and unrealized gain (loss) on
investments (4.23)
------------
Total from investment operations (4.11)
------------
Less dividends and distributions:
From net investment income (0.11)
From net realized gain on investments (0.17)
------------
Total dividends and distributions (0.28)
------------
Net asset value at end of period $ 14.13
============
Total investment return (c) (22.16%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 0.82%
Net expenses 1.30%
Expenses (before waiver/reimbursement) 1.30%
Portfolio turnover rate 66%
Net assets at end of period (in 000's) $101,999
</Table>
<Table>
<Caption>
CLASS C
----------------------------------------------------------------------------
JANUARY 1, 2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2007 2006 2005 2004 2003
Net asset value at beginning of period $ 23.12 $ 19.96 $ 18.28 $16.55 $14.13
------- ------- ------- ------ ----------------
Net investment income 0.09(a) 0.07(a) 0.02(a) 0.00(a)(b) 0.02
Net realized and unrealized gain (loss) on
investments 2.38 3.20(e) 1.67 1.75 2.42
------- ------- ------- ------ ----------------
Total from investment operations 2.47 3.27 1.69 1.75 2.44
------- ------- ------- ------ ----------------
Less dividends and distributions:
From net investment income (0.06) (0.09) (0.01) (0.02) (0.02)
From net realized gain on investments (2.54) (0.02) -- -- --
------- ------- ------- ------ ----------------
Total dividends and distributions (2.60) (0.11) (0.01) (0.02) (0.02)
------- ------- ------- ------ ----------------
Net asset value at end of period $ 22.99 $ 23.12 $ 19.96 $18.28 $16.55
======= ======= ======= ====== ================
Total investment return (c) 11.61% 16.44%(d)(e) 9.27% 10.56% 17.26%(f)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 0.38% 0.34% 0.07% 0.02% 0.18%+
Net expenses 1.92% 1.92% 1.96% 2.05% 2.13%+
Expenses (before waiver/reimbursement) 1.96% 2.05%(d) 2.03% 2.05% 2.13%+
Portfolio turnover rate 50% 48% 43% 53% 47%
Net assets at end of period (in 000's) $12,475 $13,381 $13,555 $4,418 $3,095
<Caption>
CLASS C
------------
YEAR ENDED
DECEMBER 31,
2002
Net asset value at beginning of period $18.53
------------
Net investment income 0.01
Net realized and unrealized gain (loss) on
investments (4.23)
------------
Total from investment operations (4.22)
------------
Less dividends and distributions:
From net investment income (0.01)
From net realized gain on investments (0.17)
------------
Total dividends and distributions (0.18)
------------
Net asset value at end of period $14.13
============
Total investment return (c) (22.76%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 0.07%
Net expenses 2.05%
Expenses (before waiver/reimbursement) 2.05%
Portfolio turnover rate 66%
Net assets at end of period (in 000's) $2,336
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Less than one cent per share.
(c) Total return is calculated exclusive of sales charges. Classes I, R1 and R2 are not
subject to sales charges.
(d) Includes nonrecurring reimbursements from Manager for professional fees. The effect on
total return was less than one hundredth of a percent.
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses were $0.01 per share on net
realized gains on investments and the effect on total investment return was 0.05%,
respectively.
(f) Total return is not annualized.
</Table>
18 MainStay Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
---------------------------------------------------------------------------------------------------------
JANUARY 1, 2003*
THROUGH YEAR ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31,
2007 2006 2005 2004 2003 2002
$ 23.12 $ 19.96 $ 18.28 $ 16.55 $ 14.13 $ 18.53
-------- -------- -------- -------- ---------------- ------------
0.09(a) 0.06(a) 0.01(a) 0.00(a)(b) 0.02 0.01
2.38 3.21(e) 1.68 1.75 2.42 (4.23)
-------- -------- -------- -------- ---------------- ------------
2.47 3.27 1.69 1.75 2.44 (4.22)
-------- -------- -------- -------- ---------------- ------------
(0.06) (0.09) (0.01) (0.02) (0.02) (0.01)
(2.54) (0.02) -- -- -- (0.17)
-------- -------- -------- -------- ---------------- ------------
(2.60) (0.11) (0.01) (0.02) (0.02) (0.18)
-------- -------- -------- -------- ---------------- ------------
$ 22.99 $ 23.12 $ 19.96 $ 18.28 $ 16.55 $ 14.13
======== ======== ======== ======== ================ ============
11.66%(f) 16.44%(d)(e) 9.27% 10.56% 17.26%(f) (22.76%)
0.39% 0.30% 0.07% 0.02% 0.18%+ 0.07%
1.92% 1.92% 1.96% 2.05% 2.13%+ 2.05%
1.96% 2.05%(d) 2.03% 2.05% 2.13%+ 2.05%
50% 48% 43% 53% 47% 66%
$156,553 $191,086 $560,139 $563,838 $560,740 $517,050
</Table>
<Table>
<Caption>
CLASS I
---------------------------------------------------------------
JANUARY 2, 2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2007 2006 2005 2004
$23.24 $ 20.06 $18.43 $17.86
------ ------- ------ -----------------
0.35(a) 0.32(a) 0.21(a) 0.09(a)
2.41 3.21(e) 1.69 0.48
------ ------- ------ -----------------
2.76 3.53 1.90 0.57
------ ------- ------ -----------------
(0.20) (0.33) (0.27) --
(2.54) (0.02) -- --
------ ------- ------ -----------------
(2.74) (0.35) (0.27) --
------ ------- ------ -----------------
$23.26 $ 23.24 $20.06 $18.43
====== ======= ====== =================
13.00% 17.78%(d)(e) 10.36% 3.19%(f)
1.54% 1.44% 1.13% 1.11%+
0.70% 0.75% 0.90% 0.96%+
0.75% 0.88%(d) 0.97% 0.96%+
50% 48% 43% 53%
$ 152 $19,671 $ 1 $ 1
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R1
------------------------------------------------------------
JANUARY 2, 2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2007 2006 2005 2004
Net asset value at beginning
of period $23.23 $20.05 $18.42 $17.86
------ ------ ------ -----------------
Net investment income 0.34(a) 0.31(a) 0.21(a) 0.07(a)
Net realized and unrealized
gain on investments 2.40 3.20(e) 1.69 0.49
------ ------ ------ -----------------
Total from investment
operations 2.74 3.51 1.90 0.56
------ ------ ------ -----------------
Less dividends and
distributions:
From net investment income (0.19) (0.31) (0.27) --
From net realized gain on
investments (2.54) (0.02) -- --
------ ------ ------ -----------------
Total dividends and
distributions (2.73) (0.33) (0.27) --
------ ------ ------ -----------------
Net asset value at end of
period $23.24 $23.23 $20.05 $18.42
====== ====== ====== =================
Total investment return (c) 12.89% 17.67%(d)(e) 10.31% 3.14%(f)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.48% 1.43% 1.03% 1.01%+
Net expenses 0.81% 0.85% 1.00% 1.06%+
Expenses (before
waiver/reimbursement) 0.86% 0.98%(d) 1.07% 1.06%+
Portfolio turnover rate 50% 48% 43% 53%
Net assets at end of period
(in 000's) $ 2 $ 1 $ 1 $ 1
</Table>
<Table>
** Commencement of operations.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(c) Total return is calculated exclusive of sales charges. Classes I, R1 and R2 are not
subject to sales charges.
(d) Includes nonrecurring reimbursements from Manager for professional fees. The effect on
total return was less than one hundredth of a percent.
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses were $0.01 per share on net
realized gains on investments and the effect on total investment return was 0.05%,
respectively.
(f) Total return is not annualized.
</Table>
20 MainStay Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R2
----------------------------------------------------------------
JANUARY 2, 2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
2007 2006 2005 2004
$23.20 $ 20.01 $ 18.38 $17.86
------ ------- ------- -----------------
0.32(a) 0.25(a) 0.16(a) 0.12(a)
2.33 3.22(e) 1.67 0.40
------ ------- ------- -----------------
2.65 3.47 1.83 0.52
------ ------- ------- -----------------
(0.16) (0.26) (0.20) --
(2.54) (0.02) -- --
------ ------- ------- -----------------
(2.70) (0.28) (0.20) --
------ ------- ------- -----------------
$23.15 $ 23.20 $ 20.01 $18.38
====== ======= ======= =================
12.48% 17.46%(d)(e) 10.02% 2.91%(f)
1.43% 1.16% 0.79% 0.76%+
1.06% 1.10% 1.24% 1.31%+
1.11% 1.23%(d) 1.31% 1.31%+
50% 48% 43% 53%
$ 11 $13,340 $11,356 $4,856
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises nineteen funds (collectively referred to as the
"Funds"). These financial statements and notes relate only to MainStay Value
Fund (the "Fund"), a diversified fund.
The Fund currently offers six classes of shares. Class A shares commenced on
January 3, 1995. Class B shares commenced on May 1, 1986. Class C shares
commenced on September 1, 1998. Class I shares, Class R1 shares and Class R2
shares commenced on January 2, 2004. Class A shares are offered at net asset
value per share plus an initial sales charge. No sales charge applies on
investments of $1 million or more (and certain other qualified purchases) in
Class A shares, but a contingent deferred sales charge is imposed on certain
redemptions of such shares within one year of the date of purchase. Class B
shares and Class C shares are offered without an initial sales charge, although
a declining contingent deferred sales charge may be imposed on redemptions made
within up to six years of purchase of Class B shares and a 1% contingent
deferred sales charge may be imposed on redemptions made within one year of
purchase of Class C shares. Class I, Class R1 and Class R2 shares are not
subject to a sales charge. As approved by the Board of Trustees in 1997, Class B
shares convert to Class A shares eight years after the date they were purchased.
The six classes of shares bear the same voting (except for issues that relate
solely to one class), dividend, liquidation and other rights and conditions
except that Class B and Class C shares are subject to higher distribution fee
rates than Class A and Class R2 shares under a distribution plan pursuant to
Rule 12b-1 under the 1940 Act. Class I and Class R1 shares are not subject to a
distribution or service fee. Class R1 and Class R2 shares are authorized to pay
to New York Life Investment Management LLC, its affiliates, or third-party
service providers, as compensation for services rendered to shareholders of
Class R1 or Class R2 shares, a shareholder service fee.
The Fund's investment objective is to realize maximum long-term total return
from a combination of capital growth and income.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). Securities that are not traded on the valuation date are
valued at the mean of the latest quoted bid and asked prices. Prices normally
are taken from the principal market in which each security trades. Options
contracts are valued at the last posted settlement price on the market where
such options are principally traded. Investments in mutual funds are valued at
their net asset value as of the close of the New York Stock Exchange on the date
of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: a security the trading for which has been
halted or suspended; a debt security that has recently gone into default and for
which there is not a current market quotation; a security of an issuer that has
entered into a restructuring; a security that has been de-listed from a national
exchange; a security the market price of which is not available from an
independent pricing source or, if so provided, does not, in the opinion of the
Fund's investment adviser or sub-adviser (if applicable), reflect the security's
market value; a security where the trading on that security's principal market
is temporarily closed at a time when, under normal conditions, it would be open.
At October 31, 2007, the Fund did not hold securities that were valued in such a
manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
of net investment income and distributions of net realized capital and currency
gains, if any, annually. All dividends and distributions are reinvested in
shares of the
22 MainStay Value Fund
Fund, at net asset value, unless the shareholder elects otherwise. Dividends and
distributions to shareholders are determined in accordance with federal income
tax regulations and may differ from generally accepted accounting principles in
the United States of America. Permanent book/tax differences relating to income
and gains are reclassified amongst undistributed net investment income,
accumulated net realized gain or loss and paid-in-capital.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities
purchased, other than short-term securities, for the Fund are accreted and
amortized, respectively, on the effective interest rate method over the life of
the respective securities or, in the case of a callable security, over the
period to the first date of call. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (C) on
page 24) are allocated to separate classes of shares pro rata based upon their
relative net assets value on the date the expenses are incurred. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. Premiums are received
and are recorded as liabilities. The liabilities are subsequently adjusted and
unrealized appreciation or depreciation is recorded to reflect the current value
of the options written. Premiums received from writing options which expire are
treated as realized gains. Premiums received from writing options which are
exercised or are canceled in closing purchase transactions are added to the
proceeds or netted against the amount paid on the transaction to determine the
realized gain or loss. By writing a covered call option, in exchange for the
premium, the Fund foregoes the opportunity for capital appreciation above the
exercise price should the price of the underlying security or foreign currency
increase. By writing a covered put option, the Fund, in exchange for the
premium, accepts the risk of a decline in the market value of the underlying
security or foreign currency below the exercise price. A call option may be
covered by the call writer's owning the underlying security throughout the
option period. A call option may also be covered by the call writer's
maintaining liquid assets valued at greater than the exercise price of the call
written. When writing a covered call option, the Fund, in return for the premium
on the option, gives up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as the obligation
as the writer continues, has retained the risk of loss should the price of the
underlying security decline. After writing a put option, the Fund may incur a
loss equal to the difference between the exercise price of the option and the
sum of the market value of the underlying security plus the premium received
from the sale of the option.
The Fund may purchase call and put options on its portfolio securities. The Fund
may purchase call options to protect against an increase in the price of the
security it anticipates purchasing. The Fund may purchase put options on its
securities to protect against a decline in the value of the security or to close
out covered written put positions. The Fund may also purchase options to seek to
enhance returns. Risks may arise from an imperfect correlation between the
change in market value of the securities held by the Fund and the prices of
options relating to the securities purchased or sold by the Fund and from the
possible lack of a liquid secondary market for an option. The maximum exposure
to loss for any purchased option is limited to the premium initially paid for
the option.
(H) SECURITIES LENDING. In order to realize additional income the Fund may lend
its securities to broker-dealers and financial institutions. The loans are
collateralized by cash or securities at least equal at all times to the market
value of the securities loaned. Collateral will consist of U.S. Government
securities, cash equivalents or irrevocable letters of credit. The Fund may bear
the risk of delay in recovery of, or loss of rights in, the securities loaned
should the borrower of the securities experience financial difficulty. The Fund
receives compensation for lending its securities in the form of fees or it
retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
during the term of the loan will be for the account of the Fund.
(I) INDEMNIFICATIONS. In the normal course of business, the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote.
However, there can be no assurance that material liabilities related to such
obligations will not arise in the future which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager") a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager. NYLIM provides offices and conducts clerical, recordkeeping and
bookkeeping services, and is responsible for the financial and accounting
records required to be maintained by the Fund. NYLIM also pays the salaries and
expenses of all personnel affiliated with the Fund and all the operational
expenses that are not the responsibility of the Fund. MacKay Shields LLC (the
"Subadvisor"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life, serves as subadvisor to the Fund and is responsible
for the day-to-day portfolio management of the Fund. Pursuant to the terms of a
Subadvisory Agreement between NYLIM and the Subadvisor, NYLIM pays for the
services of the Subadvisor.
The Fund is contractually obligated to pay NYLIM a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.72% on assets up to $200 million, 0.65% on assets from
$200 million to $500 million and 0.50% on assets in excess of $500 million.
Effective March 1, 2007, NYLIM has entered into a written expense limitation
agreement under which it has agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses (total annual operating expenses
excluding taxes, interest, litigation, extraordinary expenses, and brokerage and
other transaction expenses relating to the purchase or sale of portfolio
investments) do not exceed the following amounts of average daily net assets for
each class: Class A, 1.17%; Class B, 1.92%; Class C, 1.92%; Class I, 0.71%;
Class R1, 0.81% and Class R2, 1.06%. This expense limitation may be modified or
terminated only with the approval of the Board of Trustees. NYLIM may recoup the
amount of any management fee waivers or expense reimbursements from the Fund
pursuant to the agreement if such action does not cause the Fund to exceed
existing expense limitations and the recoupment is made within three years after
the year in which NYLIM incurred the expense. For the year ended October 31,
2007, the NYLIM earned fees from the Fund in the amount of $4,678,384 and waived
its fees in the amount of $320,473.
As of October 31, 2007, the amounts of waived fees that are subject to possible
recoupment by NYLIM, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2008* 2009 2010 TOTAL
$235,721 $907,175 $320,473 $1,463,369
- -----------------------------------------------------------------
</Table>
* The expense limitation agreement became effective in 2005 and the recoupments
will start to expire in 2008.
Prior to March 1, 2007, NYLIM had an agreement in place under which it had
agreed to waive a portion of the Fund's management fee or reimburse the expenses
of the Fund so that the Fund's total ordinary operating expenses did not exceed
1.17% of the Fund's average daily net assets for its Class A shares. NYLIM also
applied an equivalent waiver or reimbursement, in an equal amount of basis
points, to the other share classes of the Fund.
State Street Bank & Trust Company ("SSBT"), One Lincoln Street, Boston,
Massachusetts, 02111, provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with NYLIM. These services include calculating
daily net asset values of the Fund, maintaining general ledger and sub-ledger
accounts for the calculation of the Fund's respective net asset values, and
assisting NYLIM in conducting various aspects of the Fund's administrative
operations. For providing these services to the Fund, SSBT is compensated by
NYLIM.
(B) PAYMENTS FROM AFFILIATES. NYLIM reimbursed or paid all expenses relating to
the Board of Trustees' review of certain shareholder trading matters as
described below in the footnote relating to "Other Matters." (See Note 10 on
page 27.)
The total costs associated with the Board of Trustees' review were approximately
$849,975 and included payments to certain third party service providers.
The amount that was reimbursed to the Fund was $73,953. Additional payments were
made by affiliates relating to the shareholder trading matters. Further
discussion regarding these payments by affiliates can be found below in the
footnote relating to "Other Matters."
(C) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has a
24 MainStay Value Fund
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
Class A, Class B, Class C, and Class R2 shares, has adopted distribution plans
(the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940
Act.
Pursuant to the Class A and Class R2 Plans, the Distributor receives a monthly
distribution fee from the Fund at an annual rate of 0.25% of the average daily
net assets of the Fund's Class A and Class R2 shares, which is an expense of the
Class A and Class R2 shares of the Fund for distribution or service activities
as designated by the Distributor. Pursuant to the Class B and Class C Plans, the
Fund pays the Distributor a monthly distribution fee, which is an expense of the
Class B and Class C shares of the Fund, at the annual rate of 0.75% of the
average daily net assets of the Fund's Class B and Class C shares. The Plans
provide that the Class B and Class C shares of the Fund also incur a service fee
at the annual rate of 0.25% of the average daily net asset value of the Class B
and Class C shares of the Fund. Class I and Class R1 shares are not subject to a
distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
In accordance with the Shareholder Services Plans for the Class R1 and Class R2
shares, the Manager has agreed to provide, through its affiliates or independent
third parties, various shareholder and administrative support services to
shareholders of the Class R1 and Class R2 shares. For its services, the Manager
is entitled to a Shareholder Service Fee accrued daily and paid monthly at an
annual rate of 0.10% of the average daily net assets attributable to the Class
R1 and Class R2 shares.
(D) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $54,741 for the year ended
October 31, 2007. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $5,285, $195,585 and $1,731, respectively, for the year ended October
31, 2007.
(E) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund, for the year ended October 31, 2007,
amounted to $1,972,340.
(F) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts, effective March 1, 2007. Shareholders with an account
balance of less than $1,000 are charged an annual per account fee of $20
(assessed semi-annually).
(G) CAPITAL. At October 31, 2007, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class I $14,652 13.7%
- ------------------------------------------------------------------
</Table>
(H) OTHER. Pursuant to an Amended and Restated Management Agreement between the
Fund and NYLIM, the cost of legal services provided to the Fund by the Office of
the General Counsel of NYLIM are payable directly by the Fund. For the year
ended October 31, 2007, these fees, which are included in professional fees
shown on the Statement of Operations, were $28,547.
The Fund pays the Manager a monthly fee for certain pricing and recordkeeping
services provided under the Accounting Agreement at the annual rate of 1/20 of
1% for the first $20 million of average monthly net assets, 1/30 of 1% of the
next $80 million of average monthly net assets and 1/100 of 1% of any amount in
excess of $100 million of average monthly net assets. Fees for these services
provided to the Fund by the Manager amounted to $102,434 for the year ended
October 31, 2007.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2007, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL GAIN TEMPORARY APPRECIATION ACCUMULATED
INCOME (LOSSES) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$20,024,026 $52,510,249 $ -- $135,420,617 $207,954,892
--------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized appreciation is
primarily due to wash sale deferrals.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated undistributed
net realized gain on investments, arising from permanent differences; net assets
at October 31, 2007 are not affected.
<Table>
<Caption>
ACCUMULATED
ACCUMULATED UNDISTRIBUTED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$740 $(740) $ --
--------------------------------------------
</Table>
www.mainstayfunds.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The reclassifications for the Fund are primarily due to foreign currency gain
(loss).
The tax character of distributions paid during the years ended October 31, 2007
and October 31, 2006, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2007 2006
Distributions paid from:
Ordinary Income $14,152,385 $6,012,150
Long-term Capital Gains 71,701,490 866,376
------------------------
$85,853,875 $6,878,526
========================
</Table>
NOTE 5--WRITTEN OPTIONS:
During the year ended October 31, 2007, the Fund had the following transactions
in written options:
<Table>
<Caption>
NUMBER OF
CONTRACTS PREMIUM
Options outstanding at October 31, 2006 -- $ --
- ---------------------------------------------------------------
Options--written 1,470 143,057
- ---------------------------------------------------------------
Options--expired -- --
- ---------------------------------------------------------------
Options--canceled in closing
transactions (1,470) (143,057)
- ---------------------------------------------------------------
Options outstanding at October 31, 2007 -- $ --
- ---------------------------------------------------------------
</Table>
NOTE 6--CUSTODIAN:
SSBT is the custodian of cash and securities of the Fund. Custodial fees are
charged to the Fund based on the market value of securities in the Fund and the
number of certain cash transactions incurred by the Fund.
NOTE 7--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. These funds pay a commitment fee, at an annual rate of .060% of the
average commitment amount, regardless of usage, to The Bank of New York, which
acts as agent to the syndicate. Such commitment fees are allocated among the
funds based upon net assets and other factors. Interest on any revolving credit
loan is charged based upon the Federal Funds Advances rate. There were no
borrowings made or outstanding on the line of credit during the year ended
October 31, 2007.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2007, purchases and sales of securities, other
than short-term securities, were $363,239 and $476,094, respectively.
NOTE 9--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 1,139 $ 25,594
Shares issued to shareholders in
reinvestment of dividends and
distributions 2,665 57,265
Shares redeemed (4,426) (99,815)
-------------------
Net decrease in shares outstanding
before conversion (622) (16,956)
Shares converted from Class B (See Note
1) 1,400 31,337
-------------------
Net increase 778 $ 14,381
===================
Year ended October 31, 2006:
Shares sold 3,252 $ 70,664
Shares issued to shareholders in
reinvestment of dividends and
distributions 210 4,606
Shares redeemed (3,873) (84,695)
-------------------
Net increase (decrease) in shares
outstanding before conversion (411) (9,425)
Shares converted from Class B (See Note
1) 16,087 334,291
-------------------
Net increase 15,676 $ 324,866
===================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 603 $ 13,412
Shares issued to shareholders in
reinvestment of dividends and
distributions 966 20,575
Shares redeemed (1,615) (36,058)
-------------------
Net decrease in shares outstanding
before conversion (46) (2,071)
Shares reacquired upon conversion into
Class A (See Note 1) (1,411) (31,337)
-------------------
Net decrease (1,457) $ (33,408)
===================
Year ended October 31, 2006:
Shares sold 752 $ 16,298
Shares issued to shareholders in
reinvestment of dividends and
distributions 80 1,699
Shares redeemed (4,447) (95,504)
-------------------
Net decrease in shares outstanding
before conversion (3,615) (77,507)
Shares reacquired upon conversion into
Class A (See Note 1) (16,181) (334,291)
-------------------
Net decrease (19,796) $(411,798)
===================
</Table>
26 MainStay Value Fund
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 92 $ 2,025
Shares issued to shareholders in
reinvestment of dividends and
distributions 37 781
Shares redeemed (165) (3,684)
----------------------
Net decrease (36) $ (878)
======================
Year ended October 31, 2006:
Shares sold 108 $ 2,369
Shares issued to shareholders in
reinvestment of dividends and
distributions 2 31
Shares redeemed (210) (4,503)
----------------------
Net decrease (100) $ (2,103)
======================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 461 $ 10,236
Shares issued to shareholders in
reinvestment of dividends and
distributions 118 2,531
Shares redeemed (1,419) (32,856)
----------------------
Net decrease (840) $ (20,089)
======================
Year ended October 31, 2006:
Shares sold 1,069 $ 23,090
Shares issued to shareholders in
reinvestment of dividends and
distributions 4 91
Shares redeemed (226) (5,139)
----------------------
Net increase 847 $ 18,042
======================
</Table>
<Table>
<Caption>
CLASS R1 SHARES AMOUNT
Year ended October 31, 2007:
Shares issued to shareholders in
reinvestment of dividends and
distributions --(a) $ --(a)
----------------------
Net increase --(a) $ --(a)
======================
Year ended October 31, 2006:
Shares issued to shareholders in
reinvestment of dividends and
distributions --(a) $ --(a)
----------------------
Net increase --(a) $ --(a)
======================
</Table>
<Table>
<Caption>
CLASS R2 SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 49 $ 1,098
Shares issued to shareholders in
reinvestment of dividends and
distributions 71 1,519
Shares redeemed (695) (15,763)
----------------------
Net decrease (575) $ (13,146)
======================
Year ended October 31, 2006:
Shares sold 167 $ 3,532
Shares issued to shareholders in
reinvestment of dividends and
distributions 8 165
Shares redeemed (167) (3,620)
----------------------
Net increase 8 $ 77
======================
</Table>
(a) Less than one thousand.
NOTE 10--OTHER MATTERS:
As reported in response to requests for information by various regulators,
including the Securities and Exchange Commission ("SEC") and the New York State
Attorney General, and, as noted in the notes to the year-end 2004, 2005 and 2006
financial statements of each fund of the Trust, NYLIM was previously a party to
arrangements with certain registered representatives of broker-dealers relating
to the level of trading by clients of those registered representatives in shares
of certain funds of the Trust. All such arrangements were terminated by the
fourth quarter of 2003.
NYLIM and the Trustees of the Trust undertook a review of the possible dilutive
effects that transactions under those arrangements and certain other levels of
trading by Fund shareholders over the period from 1999 to 2003 may have had on
the funds. As a result of this review, in December 2005, NYLIM made payments
totaling $5.882 million to nine MainStay funds. The amount paid to the Mainstay
Value Fund was $374,000. NYLIM has reimbursed or paid all expenses relating to
the Board of Trustees' review of this matter.
In a separate matter, in 2004 the SEC raised concerns relating to a guarantee
provided to shareholders of the MainStay Equity Index Fund and the fees and
expenses of that Fund as well as the related guarantee disclosure to that fund's
shareholders. Discussions have been held with the SEC concerning a possible
resolution of this matter. There can be no assurance of the outcome of these
efforts.
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS:
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation
www.mainstayfunds.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
establishes for all entities, including pass-through entities such as the Fund,
a minimum threshold for financial statement recognition of the benefit of
positions taken in filing tax returns (including whether an entity is taxable in
a particular jurisdiction), and requires certain expanded tax disclosures. The
Interpretation becomes effective for the Fund's 2008 fiscal year, and is to be
applied to all open tax years as of the date of effectiveness. Based on
Management's analysis, the determination has been made that the adoption of the
interpretation on November 1, 2007, did not have an impact on the Fund's
financial statements upon adoption. Management continually reviews the Fund's
tax positions and such conclusions under the Interpretation based on factors,
including, but not limited to, ongoing analyses of tax laws, regulations and
interpretations, thereof.
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The changes to current generally accepted accounting
principles from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures
about fair value measurements. As of October 31, 2007, the Fund does not believe
the adoption of SFAS No. 157 will impact the amounts reported in the Fund's
financial statements. However, additional disclosures may be required about the
inputs used to develop the measurements and the effect of certain measurements
reported in the financial statements for a fiscal period.
28 MainStay Value Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Value Fund ("the Fund"), one of
the funds constituting The MainStay Funds, as of October 31, 2007, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years or periods in the four-year
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the periods presented through October 31,
2003, were audited by other auditors, whose report dated December 18, 2003,
expressed an unqualified opinion thereon.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2007, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Value Fund of The MainStay Funds as of October 31, 2007, the results of
its operations for the year then ended, the changes in its net assets for each
of the years in the two-year period then ended, and the financial highlights for
each of the years or periods in the four-year period then ended, in conformity
with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 20, 2007
www.mainstayfunds.com 29
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
The Board of Trustees of the Fund approved the renewal of the Fund's Management
Agreement with New York Life Investment Management LLC (the "Manager") and the
Subadvisory Agreement between the Manager and MacKay Shields LLC, a wholly-owned
indirect subsidiary of New York Life Investment Management Holdings LLC, an
affiliate of the Manager, (the "Subadvisor"), (each an "Agreement") at a meeting
held on May 22 and 23, 2007. In connection with the approval of each Agreement,
the Trustees reviewed a significant amount of a wide variety of information that
they had requested and received from the Manager and the Subadvisor, and data
and analysis from an outside data provider and a third party consultant. The
Trustees considered various industry trends and regulatory developments in their
deliberations. In considering approval of each Agreement, and in evaluating the
fairness of the compensation to be paid by the Fund, the Trustees met both as a
full Board and in executive session with no Interested Trustee present, in
advance of the meeting at which the Agreements were approved, and they
considered a number of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and the Subadvisor have provided historically to the Fund, and
also generally to other series of the Trust. Among other services, the Manager's
services have included investment management services, including monitoring and
evaluating the Subadvisor's investment program and investment results with
respect to the Fund, and the Subadvisor's compliance with the Fund's investment
policies and restrictions, and administrative services, including working with
other service providers of the Trust, maintaining certain Fund records,
providing office space, performing clerical and bookkeeping services for the
Fund, preparing Board materials and Fund filings, and otherwise managing the
Trust's operations. The Subadvisor is responsible for the day-to-day portfolio
management of the Fund, including determining the composition of assets of the
Fund and the timing of the Fund's execution of the purchase and sale of assets,
and its other services include, among other services, providing reports to the
Manager and reviewing certain aspects of Fund filings. The Trustees considered,
among other things, the Manager's and Subadvisor's management, personnel,
resources, operations and portfolio management capabilities. The Board reviewed
reports on the Subadvisor's brokerage practices, including with respect to best
execution of portfolio trades. The Trustees considered the Manager's supervision
of the Fund's service providers and its attention to the compliance program of
the Trust, the Manager, the Subadvisor and certain other service providers, as
well as the Subadvisor's attention to its compliance program. The Trustees noted
the generally favorable results of a third party review of the services and
communications that NYLIM Service Company LLC, an affiliate of the Manager and
the Subadvisor, has provided to Trust shareholders.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of funds in groups that the
Trustees concluded, in consultation with an outside data provider and a third
party consultant, were appropriate comparison groups for the Fund. The Board's
decision took account of, among other things, the Fund's generally mid-range
performance over the short term and slight underperformance over the longer term
relative to groupings of funds having similar mandates.
The Trustees considered the cost to the Manager of each Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods. In reviewing profitability information, the
Trustees reviewed, among other things, information about the allocation of
expenses among the Manager and its affiliates. The Trustees were provided
information that indicated that the profitability to the Manager and its
affiliates from the Management Agreement with respect to the Fund and from the
overall relationship with the Trust was low. The Trustees considered other
benefits that the Manager and its affiliates receive from the relationship with
the Trust, including benefits that NYLIFE Distributors and MainStay Shareholder
Services receive in exchange for services they provide to the Funds, and certain
benefits from soft dollar arrangements. The Trustees acknowledged certain
benefits to the reputation of the Manager and the Trust from their association
with each other.
The Trustees reviewed information about the compensation program for portfolio
managers employed by the Manager, including that the program was designed to
align portfolio manager compensation with investors' goals. The Trustees also
reviewed information about portfolio manager holdings in the Trust and generally
noted favorably those portfolio managers of the Trust who invest in portfolios
they manage.
The Trustees considered information about transfer agency expenses and their
effect on the Fund's overall expenses. They considered that, across the Trust
(though not every series or share class), gross transfer agency fees tended to
be relatively high and, therefore, adversely affected gross expense ratios.
Noting that the Trust historically permitted smaller investor accounts, the
Trustees considered measures that had been recently implemented that were
intended to increase the average size of shareholder accounts, including
generally higher investment minimums, and small account fees, and the Trustees
considered potential benefits to the Manager and its affiliates arising from
such measures.
30 MainStay Value Fund
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund's assets, or the assets of the Trust
overall, increase. The Trustees noted, in particular, the plans of the Manager
and its affiliates for marketing and distributing the shares of the various
series of the Trust. They noted the Manager's willingness to implement
contractual breakpoints that would reduce the Fund's management fee at asset
levels above the breakpoints, and the fact that the breakpoints were intended to
provide that shareholders would share in benefits from economies of scale
obtained through the growth in the Fund's assets. The Trustees noted that the
Fund's management fee rate had been reduced by the breakpoint schedule
applicable to the Fund. The Trustees reviewed information about the potential
effect of asset growth on Fund expenses, the difficulty of forecasting its
effect on the profitability of the Manager and its affiliates, and the
management fee breakpoints applicable to the Fund and certain other funds. It
was noted that, to the extent the Fund's gross expenses currently were higher
than its net expenses, the reduction of the Fund's gross expenses through the
achievement of economies of scale might benefit the Manager by reducing the
expenses the Manager must reimburse to the Fund rather than directly benefiting
the Fund by reducing its net expenses.
The Trustees considered information about services provided by other investment
advisers of funds having investment objectives and policies similar to the
Fund's. The Board received and reviewed, among other things, comparative data on
various types of Fund expenses. In considering the management fees paid by the
Fund, the Trustees evaluated factors such as the fees and expenses borne by
other registered funds in the market pursuing strategies generally similar to
the Fund's. The Trustees considered certain comparative data with respect to
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts having investment strategies similar to that
of the Fund, and took account of explanations and other information relating to
the fees and expenses of those other funds and accounts. The Trustees considered
the current and proposed contractual and net management fees, its anticipated
gross and net expense ratio, and various components of the expense ratio, in
comparison to other funds in comparison groupings. The Trustees generally
acknowledged the historical relationships among the Manager, the Subadvisor and
the Trust and the likely difficulties in implementing an alternative to the
investment management arrangement between the Trust and the Manager. The
Trustees took account of the Manager's willingness to maintain the management
fee waiver and expense limitation applicable to the Fund.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings, with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. This summary set out
above describes the most important, but not all, of the factors considered by
the Trustees in considering each Agreement. On the basis of their review, a
majority of the Trustees and a majority of the Non-Interested Trustees concluded
that each factor they considered, in the context of all the other factors they
considered, favored renewal of each Agreement, and it was the judgment of a
majority of the Trustees and a majority of the Non-Interested Trustees that
approval of each Agreement was in the best interests of the Fund and its
shareholders.
www.mainstayfunds.com 31
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advise shareholders within
60 days of the Fund's fiscal year end (October 31, 2007) as to the federal tax
status of dividends paid by the Fund during such fiscal year. Accordingly, the
Fund paid long-term capital gain distributions of $71,701,490.
The dividends paid by the Fund during the fiscal year ended October 31, 2007
should be multiplied by 58.8% to arrive at the amount eligible for qualified
dividend income, 18.7% for qualified interest income and 62.0% for the corporate
dividends received deduction.
In January 2008, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2007. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2007.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at www.mainstayfunds.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
or (iii) on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is availablewithout charge on the SEC's website at www.sec.gov or by calling
NYLIM at 1-800-MAINSTAY (1-800-624-6782). You also can obtain and review copies
of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC
(information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330).
SPECIAL MEETING OF SHAREHOLDERS
Pursuant to notice, a special meeting of shareholders of The MainStay Funds (the
"Trust") was held on May 4, 2007, at the offices of New York Life Investment
Management LLC in Parsippany, New Jersey. The purpose of the meeting was to
elect the following individuals to the Board of Trustees of the Trust:
- Susan B. Kerley
- Alan R. Latshaw
- Peter Meenan
- Richard H. Nolan, Jr.
- Richard S. Trutanic
- Roman L. Weil
- John A. Weisser
- Brian A. Murdock (Interested Trustee)
There are no other Trustees of the Trust.
No other business came before the special meeting. The proposal to elect
Trustees was passed by the shareholders of the Fund as shown below:
<Table>
<Caption>
VOTES VOTES
VALUE FUND FOR WITHHELD ABSTENTIONS TOTAL
Susan B.
Kerley 12,039,138.300 91,779.338 13,641.000 12,144,558.638
- --------------------------------------------------------------------------
Alan R.
Latshaw 12,038,508.252 92,409.386 13,641.000 12,144,558.638
- --------------------------------------------------------------------------
Peter Meenan 12,042,046.074 88,871.564 13,641.000 12,144,558.638
- --------------------------------------------------------------------------
Richard H.
Nolan, Jr. 12,039,693.587 91,224.051 13,641.000 12,144,558.638
- --------------------------------------------------------------------------
Richard S.
Trutanic 12,035,572.202 95,345.436 13,641.000 12,144,558.638
- --------------------------------------------------------------------------
Roman L. Weil 12,035,585.517 95,332.121 13,641.000 12,144,558.638
- --------------------------------------------------------------------------
John A.
Weisser 12,040,566.197 90,351.441 13,641.000 12,144,558.638
- --------------------------------------------------------------------------
Brian A.
Murdock 12,039,812.013 91,105.625 13,641.000 12,144,558.638
- --------------------------------------------------------------------------
</Table>
This resulted in approval of the proposal.
32 MainStay Value Fund
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Pursuant to
notice, a Special Meeting of Shareholders of the Trust was held on May 4, 2007,
at NYLIM's offices in Parsippany, New Jersey. The Trustees listed below were
elected to serve the Trust effective June 7, 2007.
Each Trustee serves until his or her successor is elected and qualified or until
his or her resignation, death or removal. The Retirement Policy provides that a
Trustee shall tender his or her resignation upon reaching age 72. A Trustee
reaching the age of 72 may continue for additional one-year periods with the
approval of the Board's Nominating and Governance Committee, except that no
Trustee shall serve on the Board past his or her 75th birthday. Officers serve a
term of one year and are elected annually by the Trustees. The business address
of each Trustee and officer listed below is 51 Madison Avenue, New York, New
York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
TERM OF OFFICE, NUMBER OF FUNDS
POSITION(S) HELD IN FUND COMPLEX
NAME AND WITH THE TRUST AND PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
BRIAN A. MURDOCK Indefinite; Member of the Board of Managers 73 Trustee, Eclipse Funds since
3/14/56 Trustee and Chief and President (since 2004) and June, 2007 (3 funds); Director,
Executive Officer Chief Executive Officer (since Eclipse Funds Inc. since June
since 2006 2006), New York Life Investment 2007 (22 funds); Director,
Management LLC and New York MainStay VP Series Fund, Inc.,
Life Investment Management since 2006 (24 portfolios);
Holdings LLC; Senior Vice Director, ICAP Funds, Inc.,
President, New York Life since 2006 (3 funds)
Insurance Company (since 2004);
Chairman of the Board and
President, NYLIFE Distributors
LLC (since 2004); Member of the
Board of Managers, NYLCAP
Manager LLC and Madison Capital
Funding LLC (since 2004),
MacKay Shields LLC and
Institutional Capital LLC
(since 2006), and McMorgan &
Company LLC (since 2007); Chief
Executive Officer, Eclipse
Funds and Eclipse Funds Inc.
(since 2006); Chairman (2006 to
2007) and Director and Chief
Executive Officer (since 2006),
MainStay VP Series Fund, Inc.;
Director and Chief Executive
Officer, ICAP Funds, Inc.
(since 2006); Chief Investment
Officer, MLIM Europe and Asia
(2001 to 2003); President of
Merrill Japan and Chairman of
MLIM's Pacific Region (1999 to
2001)
-----------------------------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow Capital
Management, Inc., McMorgan & Company LLC, NYLIFE Securities Inc. and/or NYLIFE
Distributors LLC, as described in detail above in the column "Principal
Occupation(s) During Past Five Years."
www.mainstayfunds.com 33
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. KERLEY Indefinite; Partner, Strategic Management 73 Chairman since 2005 and Trustee
8/12/51 Chairman and Advisors LLC (since 1990) since 2000, Eclipse Funds (3
Trustee since funds); Chairman since 2005 and
June 2007 Director since 1990, Eclipse
Funds Inc. (22 funds); Chairman
and Director, ICAP Funds, Inc.,
since 2006 (3 funds); Chairman
and Director, MainStay VP
Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
Legg Mason Partners Funds,
Inc., since 1991 (30
portfolios)
----------------------------------------------------------------------------------------------------------------------
ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & Young 73 Trustee, Eclipse Funds since
3/27/51 Trustee and Audit LLP (2002 to 2003); Partner, June 2007 (3 funds); Director,
Committee Arthur Andersen LLP (1989 to Eclipse Funds Inc. since June
Financial Expert 2002); Consultant to the Audit 2007 (22 funds); Director, ICAP
since 2006 and Compliance Committee of The Funds, Inc., since June 2007 (3
MainStay Funds (2004 funds); Director, MainStay VP
to 2006) Series Fund, Inc., since June
2007 (24 portfolios); Trustee,
State Farm Associates Funds
Trusts since 2005 (3
portfolios); Trustee, State
Farm Mutual Fund Trust since
2005 (15 portfolios); Trustee,
State Farm Variable Product
Trust since 2005 (9 portfolios)
----------------------------------------------------------------------------------------------------------------------
PETER MEENAN Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds since
12/5/41 Trustee since President and Chief Executive 2002 (3 funds); Director,
June 2007 Officer, Babson-United, Inc. Eclipse Funds Inc. since 2002
(financial services firm) (2000 (22 funds); Director, ICAP
to 2004); Independent Funds, Inc., since 2006 (3
Consultant (1999 to 2000); Head funds); Director, MainStay VP
of Global Funds, Citicorp (1995 Series Fund, Inc., since June
to 1999) 2007 (24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD H. Indefinite; Managing Director, ICC Capital 73 Trustee, Eclipse Funds since
NOLAN, JR. Trustee since Management; President--Shields/ June 2007 (3 funds); Director,
11/16/46 June 2007 Alliance, Alliance Capital Eclipse Funds Inc. since June
Management (1994 to 2004) 2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 2006
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
RICHARD S. Indefinite; Chairman (since 1990) and Chief 73 Trustee, Eclipse Funds since
TRUTANIC Trustee since Executive Officer (1990 to June 2007 (3 funds); Director,
2/13/52 1994 1999), Somerset Group Eclipse Funds Inc. since June
(financial advisory firm); 2007 (22 funds); Director, ICAP
Managing Director and Advisor, Funds, Inc., since June 2007 (3
The Carlyle Group (private funds); Director, MainStay VP
investment firm) (2002 to Series Fund, Inc., since June
2004); Senior Managing Director 2007 (24 portfolios)
and Partner, Groupe Arnault
S.A. (private investment firm)
(1999 to 2002)
----------------------------------------------------------------------------------------------------------------------
</Table>
34 MainStay Value Fund
<Table>
<Caption>
TERM OF OFFICE,
POSITION(S) HELD NUMBER OF FUNDS
WITH THE TRUST IN FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEE
ROMAN L. WEIL Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds since
5/22/40 Trustee and Audit Accounting, Graduate School of June 2007 (3 funds); Director,
Committee Business, University of Eclipse Funds Inc. since June
Financial Expert Chicago; President, Roman L. 2007 (22 funds); Director, ICAP
since June 2007 Weil Associates, Inc. Funds, Inc., since June 2007 (3
(consulting firm) funds); Director, MainStay VP
Series Fund, Inc., since 1994
(24 portfolios)
----------------------------------------------------------------------------------------------------------------------
JOHN A. WEISSER Indefinite; Retired. Managing Director of 73 Trustee, Eclipse Funds since
10/22/41 Trustee since Salomon Brothers, Inc. (1971 to June 2007 (3 funds); Director,
June 2007 1995) Eclipse Funds Inc. since June
2007 (22 funds); Director, ICAP
Funds, Inc., since June 2007 (3
funds); Director, MainStay VP
Series Fund, Inc., since 1997
(24 portfolios); Trustee,
Direxion Funds (69 funds) and
Direxion Insurance Trust (45
funds) since March 2007
----------------------------------------------------------------------------------------------------------------------
</Table>
Terry L. Lierman resigned as Trustee of the Trust effective May 31, 2007. Edward
J. Hogan, John B. McGuckian and Donald E. Nickelson resigned as Trustees of the
Trust effective June 7, 2007.
At a meeting of the Board of Trustees held on June 7 and 8, 2007, the following
individuals were appointed to serve as Officers of the Trust effective June 7,
2007:
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ROBERT A. Chief Legal Senior Managing Director, General Counsel and Secretary, New
ANSELMI Officer since York Life Investment Management LLC (including predecessor
10/19/46 2004 advisory organizations) (since 2000); Secretary (since 2001)
and General Counsel (since 2004), New York Life Investment
Management Holdings LLC; Senior Vice President, New York
Life Insurance Company (since 2000); Vice President and
Secretary, McMorgan & Company LLC (since 2001); Secretary,
NYLIM Service Company LLC (since 2005), NYLCAP Manager LLC
(since 2004), Madison Capital Funding LLC (since 2002), and
Institutional Capital LLC (since 2006); Chief Legal Officer,
Eclipse Funds, Eclipse Funds Inc. and MainStay VP Series
Fund, Inc. (since 2004), McMorgan Funds (since 2005) and
ICAP Funds, Inc. (since 2006); Managing Director and Senior
Counsel, Lehman Brothers Inc. (1998 to 1999); General
Counsel and Managing Director, JP Morgan Investment
Management Inc. (1986 to 1998)
-------------------------------------------------------------------------------------------------
JACK R. Treasurer and Managing Director, New York Life Investment Management LLC
BENINTENDE Principal (since June 2007); Treasurer and Principal Financial and
5/12/64 Financial and Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
Accounting MainStay VP Series Fund, Inc., and ICAP Funds, Inc. (since
Officer since June 2007); Vice President, Prudential Investments (2000 to
June 2007 2007); Assistant Treasurer, JennisonDryden Family of Funds,
Target Portfolio Trust, The Prudential Series Fund and
American Skandia Trust (2006 to 2007); Treasurer and
Principal Financial Officer, The Greater China Fund (2007)
-------------------------------------------------------------------------------------------------
STEPHEN P. President since Senior Managing Director and Chief Marketing Officer, New
FISHER March 2007 York Life Investment Management LLC (since 2005); Managing
2/22/59 Director--Retail Marketing, New York Life Investment
Management LLC (2003 to 2005); President, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series Fund, Inc., and ICAP
Funds, Inc. (since March 2007); Managing Director, UBS
Global Asset Management (1999 to 2003)
-------------------------------------------------------------------------------------------------
SCOTT T. Vice President-- Director, New York Life Investment Management LLC (including
HARRINGTON Administration predecessor advisory organizations) (since 2000); Executive
2/8/59 since 2005 Vice President, New York Life Trust Company (since 2006);
Vice President--Administration, Eclipse Funds, Eclipse Funds
Inc. and MainStay VP Series Fund, Inc. (since 2005) and ICAP
Funds, Inc. (since 2006)
-------------------------------------------------------------------------------------------------
</Table>
www.mainstayfunds.com 35
<Table>
<Caption>
POSITION(S) HELD
WITH THE TRUST
NAME AND AND PRINCIPAL OCCUPATION(S)
DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Senior Managing Director and Chief Compliance Officer (since
MICUCCI President and 2006) and Managing Director and Chief Compliance Officer
12/16/65 Chief Compliance (2003 to 2006), New York Life Investment Management LLC and
Officer since New York Life Investment Management Holdings LLC; Senior
2006 Managing Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE Distributors
LLC; Chief Compliance Officer, NYLCAP Manager LLC (since
2006); Senior Vice President and Chief Compliance Officer,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund,
Inc., and ICAP Funds, Inc. (since 2006); Vice President--
Compliance, Eclipse Funds, Eclipse Funds Inc. and MainStay
VP Series Fund, Inc. (2004 to 2006); Deputy Chief Compliance
Officer, New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman Sachs
Asset Management (1999 to 2002)
-------------------------------------------------------------------------------------------------
MARGUERITE E.H. Secretary since Managing Director and Associate General Counsel, New York
MORRISON* 2004 Life Investment Management LLC (since 2004); Managing
3/26/56 Director and Secretary, NYLIFE Distributors LLC (since
2005); Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP Funds,
Inc. (since 2006); Chief Legal Officer--Mutual Funds and
Vice President and Corporate Counsel, The Prudential
Insurance Company of America (2000 to 2004)
-------------------------------------------------------------------------------------------------
</Table>
* In addition to serving as Secretary to the Trust, effective January 1, 2008,
Marguerite E.H. Morrison will assume the role of Chief Legal Officer to the
Trust.
Arphiela Arizmendi resigned as Treasurer and Principal Financial and Accounting
Officer of the Trust effective June 7, 2007.
Christopher O. Blunt resigned as President of the Trust effective March 12,
2007.
Alan J. Kirshenbaum resigned as Senior Vice President of the Trust effective
March 19, 2007.
36 MainStay Value Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay 130/30 Core Fund
MainStay 130/30 Growth Fund
MainStay All Cap Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay ICAP Equity Fund
MainStay ICAP Select Equity Fund
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(2)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay 130/30 High Yield Fund(2)
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Institutional Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Principal Preservation Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Income Manager Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay 130/30 International Fund
MainStay Global High Income Fund
MainStay ICAP International Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
RETIREMENT FUNDS
MainStay Retirement 2010 Fund
MainStay Retirement 2020 Fund
MainStay Retirement 2030 Fund
MainStay Retirement 2040 Fund
MainStay Retirement 2050 Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
New York, New York
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
Chicago, Illinois
MACKAY SHIELDS LLC(3)
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
MCMORGAN & COMPANY LLC(3)
San Francisco, California
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
This page intentionally left blank
This page intentionally left blank
(NEW YORK LIFE INVESTMENT MANAGEMENT LLC LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2007 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A011872 (RECYCLE SYMBOL) MS329-07 MSV11-12/07
15
FORM N-CSR
ITEM 2. CODE OF ETHICS.
As of the end of the period covered by this report, the Registrant has adopted a
code of ethics (the "Code") that applies to the Registrant's principal executive
officer ("PEO") and principal financial officer ("PFO"). The Code was not
amended during the period covered by the report. A copy of the Code is filed
herewith. The Registrant did not grant any waivers, including implicit waivers,
from any provisions of the Code to the PEO or PFO during the period covered by
this report.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Trustees has determined that the Registrant has two audit committee
financial experts serving on its Audit Committee. The Audit Committee financial
experts are Alan R. Latshaw and Roman L. Weil. Messrs. Latshaw and Weil are
"independent" within the meaning of that term under the Investment Company Act
of 1940.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees billed for the fiscal year ended October 31, 2007 for
professional services rendered by KPMG LLP ("KPMG") for the audit of the
Registrant's annual financial statements or services that are normally provided
by KPMG in connection with statutory and regulatory filings or engagements for
that fiscal year were $747,000.
The aggregate fees billed for the fiscal year ended October 31, 2006 for
professional services rendered by KPMG for the audit of the Registrant's annual
financial statements or services that are normally provided by KPMG in
connection with statutory and regulatory filings or engagements for that fiscal
year were $812,750.
(b) Audit Related Fees
The aggregate fees billed for assurance and related services by KPMG that are
reasonably related to the performance of the audit of the Registrant's financial
statements and are not reported under paragraph (a) of this Item were: (i)
$0 for the fiscal year ended October 31, 2007, and (ii) $0 for the fiscal
year ended October 31, 2006. These audit-related services include review of
financial highlights for Registrant's registration statements and issuance of
consents to use of the auditor's reports.
(c) Tax Fees
The aggregate fees billed for professional services rendered by KPMG for tax
compliance, tax advice, and tax planning were: (i) $70,700 during the fiscal
year ended October 31, 2007, and (ii) $90,100 during the fiscal year ended
October 31, 2006. These services primarily included preparation of federal,
state and local income tax returns and excise tax returns, as well as services
relating to excise tax distribution requirements.
(d) All Other Fees
The aggregate fees billed for products and services provided by KPMG, other than
the services reported in paragraphs (a) through (c) of this Item were: (i)
$0 during the fiscal year ended October 31, 2007, and (ii) $0 during the
fiscal year ended October 31, 2006.
(e) Pre-Approval Policies and Procedures
(1) The Registrant's Audit and Compliance Committee has adopted
pre-approval policies and procedures (the "Procedures") to govern the
Committee's pre-approval of (i) all audit services and permissible
non-audit services to be provided to the Registrant by its independent
accountant, and (ii) all permissible non-audit services to be provided by
such independent accountant to the Registrant's investment adviser and to
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the Registrant
(collectively, the "Service Affiliates") if the services directly relate to
the Registrant's operations and financial reporting. In accordance with the
Procedures, the Audit and Compliance Committee is responsible for the
engagement of the independent accountant to certify the Registrant's
financial statements for each fiscal year. With respect to the pre-approval
of non-audit services provided to the Registrant and its Service
Affiliates, the Procedures provide that the Audit and Compliance Committee
may annually pre-approve a list of the types of services that may be
provided to the Registrant or its Service Affiliates, or the Audit and
Compliance Committee may pre-approve such services on a project-by-project
basis as they arise. Unless a type of service has received general
pre-approval, it will require specific pre-approval by the Audit and
Compliance Committee if it is to be provided by the independent accountant.
The Procedures also permit the Audit and Compliance Committee to delegate
authority to one or more of its members to pre-approve any proposed
non-audit services that have not been previously pre-approved by the Audit
and Compliance Committee, subject to the ratification by the full Audit and
Compliance Committee no later than its next scheduled meeting. To date, the
Audit and Compliance Committee has not delegated such authority.
(2) With respect to the services described in paragraphs (b) through (d) of
this Item 4, no amount was approved by the Audit and Compliance Committee
pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) There were no hours expended on KPMG's engagement to audit the Registrant's
financial statements for the most recent fiscal year attributable to work
performed by persons other than KPMG's full-time, permanent employees.
(g) All non-audit fees billed by KPMG for services rendered to the Registrant
for the fiscal years ended October 31, 2007 and October 31, 2006 are disclosed
in 4(b)-(d) above.
The aggregate non-audit fees billed by KPMG for services rendered to the
Registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the adviser that provides ongoing services to the Registrant were
approximately: (i) $32,750 for the fiscal year ended October 31, 2007, and
(ii) $25,000 for the fiscal year ended October 31, 2006.
(h) The Registrant's Audit and Compliance Committee has determined that the
non-audit services rendered by KPMG for the fiscal year ended October 31, 2007
to the Registrant's investment adviser and any entity controlling, controlled
by, or under common control with the Registrant's investment adviser that
provides ongoing services to the Registrant that were not required to be
pre-approved by the Audit and Compliance Committee because they did not relate
directly to the operations and financial reporting of the registrant were
compatible with maintaining the respective independence of KPMG during the
relevant time period.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS
The Schedule of Investments is included as part of Item 1 of this report.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not Applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Since the Registrant's last response to this Item, there have been no material
changes to the procedures by which shareholders may recommend nominees to the
Registrant's Board of Trustees.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based on an evaluation of the Registrant's Disclosure Controls and
Procedures (as defined in Rule 30a-3(c) under the Investment Company Act of
1940) (the "Disclosure Controls"), as of a date within 90 days prior to the
filing date (the "Filing Date") of this Form N-CSR (the "Report"), the
Registrant's principal executive officer and principal financial officer have
concluded that the Disclosure Controls are reasonably designed to ensure that
information required to be disclosed by the Registrant in the Report is
recorded, processed, summarized and reported by the Filing Date, including
ensuring that information required to be disclosed in the Report is accumulated
and communicated to the Registrant's management, including the Registrant's
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.
(b) There were no changes in the Registrant's internal control over financial
reporting (as defined in Rule 30a-3(d)) under the Investment Company Act of 1940
that occurred during the second fiscal quarter of the period covered by this
report that has materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of Ethics
(a)(2) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2 under the Investment Company Act of 1940.
(b) Certifications of principal executive officer and principal financial
officer as required by Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
THE MAINSTAY FUNDS
By: /s/ Stephen P. Fisher
---------------------------------
Stephen P. Fisher
President
Date: January 4, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
By: /s/ Stephen P. Fisher
---------------------------------
Stephen P. Fisher
President
Date: January 4, 2008
By: /s/ Jack R. Benintende
---------------------------------
Jack R. Benintende
Treasurer and Principal Financial
and Accounting Officer
Date: January 4, 2008
EXHIBIT INDEX
(a)(1) Code of Ethics
(a)(2) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2 under the Investment Company Act of 1940.
(b) Certification of principal executive officer and principal financial officer
as required by Section 906 of the Sarbanes-Oxley Act of 2002.